QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
to

Commission File Number 000-51329

XenoPort,
Inc.

(Exact name of registrant as specified in its charter)

Delaware

94-3330837

(State or other jurisdiction of

incorporation or organization)

(IRS employer

identification no.)

3410 Central Expressway,

Santa Clara, California

95051

(Address of principal executive offices)

(Zip code)

(408) 616-7200

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer

¨

Accelerated filer

x

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). ¨ Yes x No

Total number of shares of common stock outstanding as of October 15, 2013: 47,736,316.

XenoPort, Inc., or the Company, was incorporated in the state of Delaware on May 19, 1999. The Company is a biopharmaceutical company
focused on developing and commercializing a portfolio of internally discovered product candidates with an initial focus on neurological disorders. The Company is currently commercializing
HORIZANT® (gabapentin enacarbil) Extended-Release Tablets in the United States and is developing its novel fumaric acid ester product candidate. The Company also has two internally discovered
product candidates that may be developed as treatments for neurological disorders in the future to the extent its resources permit or the Company enters into collaborations with third parties for such development. HORIZANT and the Companys
product candidates are prodrugs that are typically created by modifying the chemical structure of currently marketed drugs, referred to as parent drugs, and are designed to correct limitations in the oral absorption, distribution and/or metabolism
of the parent drug. HORIZANT and each of the Companys product candidates are orally-available, patented molecules that address potential markets with clear unmet medical needs. The Companys facilities are located in Santa Clara,
California.

On November 8, 2012, the Company reached an agreement with Glaxo Group Limited, or GSK, to terminate the Amended and
Restated Development and Commercialization Agreement dated November 7, 2010, between the Company and GSK regarding HORIZANT.

Under
the terms of the November 2012 termination and transition agreement, during a transition period that ended on April 30, 2013, GSK continued to exclusively commercialize, promote, manufacture and distribute HORIZANT in the United States. The
Company was not eligible to receive any milestone payments from GSK and did not receive any revenue or incur any losses from GSKs sales of HORIZANT during the transition period. GSK will continue to fully fund the costs associated with the
management and conduct of required post-marketing clinical studies initiated by GSK prior to the date of the termination and transition agreement. In addition, GSK provided to the Company inventory of gabapentin enacarbil in GSKs possession
that was not required for use by GSK in the manufacture of HORIZANT and related manufacturing property and equipment. In exchange for such inventory, the Company will make annual payments to GSK of $1,000,000 for six years beginning in 2016, which
is recorded as Other noncurrent liability on the Companys balance sheet for the periods ended September 30, 2013 and December 31, 2012. Pursuant to a separate stock purchase agreement, or SPA, entered into between the
Company and GSK on November 8, 2012, GSK purchased $20,000,000 of the Companys common stock, or an aggregate of 1,841,112 shares at $10.863 per share, which per share price represented a 12.5 percent premium to the average of the closing
prices of the Companys common stock for the ten trading days prior to October 31, 2012. In addition, on November 9, 2012, the Company exercised a put option requiring GSK to purchase an additional 2,190,100 shares of the
Companys common stock at $9.132 per share, which per share price represented a 12.5 percent premium to the average of the closing prices of the Companys common stock for the ten trading days prior to November 9, 2012. On
May 1, 2013, the Company completed the acquisition of the HORIZANT business in accordance with the termination and transition agreement and assumed all responsibilities and associated rights for the further development, manufacturing and
commercialization of HORIZANT in the United States on that date. GSK was responsible for the commercial manufacture and supply of HORIZANT during the transition period, and the Company has elected to have GSK continue to supply HORIZANT tablets to
the Company for up to six months following the transition period on pricing terms established under the termination and transition agreement. The Company did not assume any liabilities of GSKs HORIZANT business as of the acquisition date.

This termination and transition agreement between the Company and GSK also provided for a mutual release of claims and resolved all ongoing
litigation between the parties.

Basis of Preparation

The accompanying financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012
are unaudited. These unaudited financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to
present fairly the Companys financial position as of September 30, 2013 and comprehensive losses for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and
2012. The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification, is the single source of authoritative U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for the three
and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any other interim period or any other future year. For more complete financial information,
these financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2012 included in the Companys Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 14, 2013. The results of operations of the acquired HORIZANT business, along with the fair values of the assets acquired in the transaction, have been included in the Companys financial statements since the
May 1, 2013 acquisition date.

The
Company began selling HORIZANT to wholesalers in May 2013 following the return of the Companys commercial rights from GSK. The Company recognizes revenue from HORIZANT product sales when there is persuasive evidence that an arrangement exists,
delivery to the customer has occurred, the price is fixed or determinable and collectability is reasonably assured. Revenue from product sales is recorded net of estimated allowances for government rebates such as Medicaid reimbursements, patient
assistance programs, customer incentives such as cash discounts for prompt payment, distributor fees and expected returns, as appropriate, which are based on an analysis of historical return rates and deductions of HORIZANT, since its commercial
launch by GSK in the second quarter of 2011. Calculating certain of these items involves estimates and judgments based on contractual terms, historical utilization rates data for HORIZANT and new information regarding changes in these programs
regulations and guidelines that would impact the amount of the actual rebates, the Companys expectations regarding future utilization rates for these programs and channel inventory data.

Items Deducted from Gross Product Sales

Prompt Pay Discount

The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on GSKs
commercialization experience, the Company expects customers to continue to comply with the prompt payment terms to earn the cash discount as the Company is selling HORIZANT to the same customers under similar prompt payment terms and conditions. The
Company estimates cash discounts for prompt payment based on contractual terms, GSKs historical utilization rates and the Companys expectations regarding future utilization rates. The Company accounts for cash discounts by reducing
accounts receivable by the full amount and recognizing the discount as a reduction of revenue in the same period the related revenue is recognized.

Distributor Fees

Under the Companys inventory management agreements with significant wholesalers, the Company pays the wholesalers a fee primarily
for distribution services as well as the maintenance of inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales. The Company accrues the contractual amount and recognizes the discount as a reduction
of revenue in the same period the related revenue is recognized.

Product Returns

The Company does not provide its customers with a general right of product return, but permits returns if the product is damaged or defective
when received by the customer, or if the product has or is nearly expired. HORIZANT tablets currently have a shelf-life of 36 months from the date of manufacture. The Company will accept returns for product that will expire within six months or that
have expired up to one year after their expiration dates. The Company obtained actual return history by type from GSK since GSKs product launch in 2011, which provides a basis to reasonably estimate the Companys future product returns.
The Company estimates returns taking into consideration Company-specific adjustments to GSKs returns history, the shelf life of product, shipment and prescription trends and estimated distribution channel inventory levels.

Government Rebates

The Company participates in a number of government rebate programs, such as the Medicaid Drug Rebate Program that provides assistance to
eligible low-income patients based on each individual states guidelines regarding eligibility and services, Public Health Services or 340b programs, and the Medicare Part D Coverage Gap Discount Program, which provides rebates on prescriptions
that fall within the donut hole coverage gap; and the Department of Veterans Affairs that offers discounts to authorized users of HORIZANT. HORIZANT is also listed on the Federal Supply Schedule, or FSS, of the General
Services Administration which provides a discount to the Department of Defense, Department of Veterans Affairs, and TriCare. The Company estimates reductions to the Companys revenues for government rebate programs based on product pricing,
current rebates, GSKs historical and estimated utilization rates, new information regarding changes in these programs regulations and guidelines that would impact the amount of the actual rebates, the Companys expectations
regarding future rebates for these programs and estimated levels of inventory in the distribution channel.

Patient Assistance

The Company offers a co-pay card program to assist commercially insured patients with the cost of their HORIZANT related
co-payments. Participating retail pharmacies get reimbursed by the Company for the amount of the co-pay assistance provided to eligible patients. The Company estimates and accrues the cost of the co-pay program based on historical redemption
activity for this program. The Company reimburses the participating pharmacies approximately one month after the prescriptions subject to co-pay assistance are filled.

Cost of product sales includes direct and indirect costs to manufacture product sold, including tableting, packaging, storage, shipping and
handling costs and inventory write-downs, if any.

Accounts Receivable

Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, wholesaler discounts and chargebacks. The need
for bad debt allowance is evaluated each reporting period based on the Companys assessment of the credit worthiness of its customers.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out, or FIFO, basis. The Company will regularly
evaluate the Companys inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales compared to quantities on hand and the remaining shelf life of HORIZANT.
Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories.

Inventories that are not expected
to be consumed within twelve months following the balance sheet date are classified as a noncurrent asset.

Inventories as of
September 30, 2013 are summarized as follows (in thousands):

Raw materials

$

10,333

Work in progress

1,228

Finished goods

724

Total inventory

12,285

Less: Long-term inventories

10,341

Total inventory classified as current

$

1,944

The Company did not have inventories as of December 31, 2012.

Nonretirement Postemployment Benefits

On May 31, 2012, the Company adopted the XenoPort Amended and Restated 2012 Severance Plan, or the 2012 Severance Plan, for the benefit of
the Companys non-executive employees. Under the terms of the 2012 Severance Plan, a non-executive employee terminated by the Company because of elimination of his or her position is eligible to receive continuation of medical insurance under
COBRA and specified severance payments based on the employees level and years of service with the Company. The Company accounts for employee termination benefits in accordance with the provisions of the Compensation-Nonretirement
Postemployment Benefits topic of the Codification and records employee termination liabilities once they are both probable and estimable for severance provided under the Companys existing severance program.

On June 14, 2013, the Company implemented a reduction in force that included the elimination of certain non-executive positions as the
Company completed certain work projects on its arbaclofen placarbil development program. As a result, the Company recorded severance benefits charges of $0 and $703,000 in the three and nine months ended September 30, 2013, respectively, which
were included in the Research and development line of the Operating expenses section of the Companys statements of comprehensive loss. As of September 30, 2013, the associated liability balance, included within
Accrued compensation on the Companys balance sheets, was $275,000.

2. Collaboration

Astellas Pharma Inc.

In December 2005, the Company entered into an agreement pursuant to which it licensed to Astellas Pharma Inc.,
or Astellas, exclusive rights to develop and commercialize gabapentin enacarbil in Japan, Korea, the Philippines, Indonesia, Thailand and Taiwan. Astellas commenced commercialization of gabapentin enacarbil in Japan, and began selling gabapentin
enacarbil in Japan in July 2012 under the trade name of REGNITE® (gabapentin enacarbil) Extended-Release Tablets. In May 2013, Astellas notified the Company that it did not have plans for the
commercialization of gabapentin enacarbil in the five other Asian countries in its territory. As a result, in May 2013, the rights to gabapentin enacarbil in Korea, the Philippines, Indonesia, Thailand and Taiwan reverted to the Company. In the
three and nine months ended September 30, 2013 and 2012, the Company recognized revenue of $379,000 and $1,137,000, respectively, representing amortization of the up-front license payment under this agreement. In the three months ended
March 31, 2012, the Company also recognized a $10,000,000 milestone payment in connection with the approval of REGNITE in Japan. In the three and nine months ended September 30, 2013, the Company recognized $111,000 and $258,000,
respectively, in royalty revenue. No royalty revenue was received in the three and nine months ended September 30, 2012. As of September 30, 2013, the Company had recognized an aggregate of $52,236,000 of revenue pursuant to this
agreement. At September 30, 2013, $13,131,000 of revenue was deferred under this agreement and is being recognized on a straight-line basis over a period that the Company expects to remain obligated to provide services, of which $1,515,000 was
classified within current liabilities and the remaining $11,616,000 was recorded as a noncurrent liability.

The Company accounted for the November 2012 termination and transition agreement and the stock purchase agreement with GSK
in accordance with the provisions of the Business Combinations topic of the Codification. Under the provisions of the Business Combinations topic, the acquisition date for a business is the date on which the Company obtains control of
the acquiree. The Company obtained control of the HORIZANT business at the end of the transition period, or May 1, 2013. Accordingly, on November 8, 2012, the transaction did not meet the definition of a business combination, and the
Company accounted for the transaction as a multiple element arrangement consisting of the settlement of a pre-existing relationship in exchange for the right to acquire the HORIZANT business at the end of a defined transition period, the sale of
common stock at a premium and the obligation by the Company to make certain cash payments to GSK in the future. The value of the HORIZANT business was based on an estimated discounted cash flow analysis attributable to the HORIZANT business.

The following table summarizes the fair value of consideration exchanged as part of the termination and transition agreement (in thousands):

Cash payable to GSK (recorded as Other noncurrent liability on the Companys balance sheet for the year ended
December 31, 2012)

$

2,314

Issuance of common shares to GSK

30,268

Cash received for common shares issued to GSK

(40,000

)

Settlement of litigation with GSK

20,499

Transaction costs

476

$

13,557

The consideration exchanged was recorded in the Companys financial statements for the year ended
December 31, 2012.

On May 1, 2013, the Company obtained control of and thus completed the acquisition of certain assets of
HORIZANT that constituted a business acquisition as defined under the provisions of the Business Combinations topic. Accordingly, the transaction reflected the removal of the right to the HORIZANT business (which was recorded at fair value,
as determined by a discounted cash flow analysis, that remained unchanged as of May 1, 2013), and the recording of the acquisition date fair values of the acquired inventory and manufacturing property and equipment assets. Assets acquired as a
result of this transaction were as follows (in thousands):

Inventories

$

11,733

Manufacturing property and equipment

1,967

Total assets acquired

$

13,700

Inventories were comprised of acquired raw materials, specifically gabapentin enacarbil, and were valued using
the cost approach. The cost approach provides a framework for estimating value based on the principle of substitution. The estimated fair value was calculated based on the costs to replace or reproduce the asset, including the cost of
recrystallization of the raw material received, while considering any impact on the value of any obsolescence.

Manufacturing property and
equipment acquired included certain equipment and a dedicated manufacturing suite for use in the manufacture of HORIZANT and was recorded at fair value using the replacement cost method. The replacement cost method uses an estimate of the cost of
replacing or reproducing an asset to measure value. This amount is then reduced to reflect the amount of depreciation that has accrued given the assets age. Other factors and adjustments were considered in concluding on the fair value
including obsolescence of the acquired assets. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets, which is ten years.

During the three and nine months ended September 30, 2013, the Company incurred $171,000 and $476,000, respectively, in transaction costs
related to the HORIZANT business acquisition, which primarily consisted of legal, accounting and valuation-related expenses. These expenses were recorded in the Selling, general and administrative line of the Operating
expenses section of the Companys statements of comprehensive loss.

The Company recorded net revenues of $3,677,000 and a net
loss of $11,377,000 from the acquired HORIZANT business in the Companys statements of comprehensive loss from the acquisition date through September 30, 2013.

The following unaudited supplemental pro forma information summarizes the combined results of
operations of the Company and the HORIZANT business as though the acquisition had occurred on January 1, 2012 (in thousands):

Three Months EndedSeptember 30,

Nine Months EndedSeptember 30,

2013

2012

2013

2012

Revenues

$

2,527

$

1,955

$

6,249

$

25,578

Net loss

$

18,816

$

23,513

$

73,653

$

53,306

These amounts have been calculated after applying the Companys accounting policies and adjusting the
results of the HORIZANT business to reflect the following adjustments:



An amendment to depreciation expense included in costs of goods sold to reflect the depreciation of the fair value of the acquired manufacturing property and equipment over the estimated remaining useful lives of the
respective assets.



The difference between the cost of raw materials known as active pharmaceutical ingredient, or API, that GSK incurred and the Companys recorded fair value of the API.



The difference in selling expense between GSK direct selling expenses and the Companys third party contractual costs.

The pro forma information presented above is for informational purposes only and is not indicative of the results of operations that would
have been achieved if the acquisition had taken place at the beginning of January 2012, nor is it indicative of any future results.

4. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding
for the period without consideration for potential common shares. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period plus any dilutive potential common shares
for the period determined using the treasury-stock method. For purposes of this calculation, restricted stock units, options to purchase stock and warrants are considered to be potential common shares and are only included in the calculation of
diluted net loss per share when their effect is dilutive.

Three MonthsEnded September 30,

Nine MonthsEnded September 30,

2013

2012

2013

2012

(In thousands, except per share amounts)

Numerator:

Net loss

$

(18,816

)

$

(16,753

)

$

(66,745

)

$

(33,856

)

Denominator:

Weighted-average common shares outstanding

47,691

41,016

47,471

37,480

Basic and diluted net loss per share

$

(0.39

)

$

(0.41

)

$

(1.41

)

$

(0.90

)

Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive
effect:

The carrying amounts of certain of the Companys financial instruments, including cash and cash equivalents and
short-term investments, are stated at fair value. The Company accounts for the fair value of its financial instruments in accordance with the provisions of the Fair Value Measurement topic of the Codification.

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants at the measurement date. The Company applies the market approach valuation technique for fair value measurements on a recurring basis and attempts to maximize the use of observable inputs and minimize the use of
unobservable

inputs. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. All of the Companys cash equivalents and short-term
investments are measured using inputs classified at Level 1 or Level 2 within the fair value hierarchy. Level 1 inputs are quoted prices in active markets for identical assets. Level 2 inputs are based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for
substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including
but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and market reference data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and are significant to the
fair value of the assets or liabilities.

The following are summaries of cash and cash equivalents, short-term investments and restricted
investments (in thousands):

Cost

GrossUnrealizedGains

GrossUnrealizedLosses

EstimatedFairValue

As of September 30, 2013:

Cash

$

3,752

$



$



$

3,752

Money market funds

9,765





9,765

U.S. government-sponsored agencies

1,070





1,070

Corporate debt securities

59,712

13

(10

)

59,715

Certificates of deposit

1,725





1,725

$

76,024

$

13

$

(10

)

$

76,027

Reported as:

Cash and cash equivalents

$

13,517

Short-term investments

60,785

Restricted investments

1,725

$

76,027

Cost

GrossUnrealizedGains

GrossUnrealizedLosses

EstimatedFairValue

As of December 31, 2012:

Cash

$

915

$



$



$

915

Money market funds

20,897





20,897

U.S. government-sponsored agencies

11,329

1



11,330

Corporate debt securities

105,839

32

(11

)

105,860

Certificates of deposit

1,955





1,955

$

140,935

$

33

$

(11

)

$

140,957

Reported as:

Cash and cash equivalents

$

36,134

Short-term investments

102,868

Restricted investments

1,955

$

140,957

At September 30, 2013 and December 31, 2012, the contractual maturities of all investments held were
less than one year. All investments have been designated as available-for-sale, and changes to unrealized gains and losses are reflected as the only component of accumulated other comprehensive income. The Company views its available-for-sale
portfolio as available for use in current operations. Accordingly, the Company has classified all investments as short-term, even though the stated maturity may be one year or more beyond the current balance sheet date.

No gross realized gains or losses were recognized and accordingly, there were no amounts reclassified out of accumulated other comprehensive
income to earnings in the three or nine months ended September 30, 2013 or in the same periods in 2012.

The Companys
available-for-sale investments, which include cash equivalents and short-term investments, are measured at fair value on a recurring basis and are classified at the following fair value hierarchy (in thousands):

Other accrued liabilities at September 30, 2013 and December 31, 2012 were as follows (in thousands):

September 30,2013

December 31,2012

Accrued product costs

$

1,598

$



Accrued selling and marketing expenses

1,114

276

Accrued general and administrative expenses

760

1,047

Other liabilities

416

101

Total other accrued liabilities

$

3,888

$

1,424

7. Stock-Based Compensation

Details of the Companys employee non-cash stock-based compensation were as follows:

Three MonthsEnded September 30,

Nine MonthsEnded September 30,

2013

2012

2013

2012

(In thousands)

Research and development

$

618

$

935

$

2,523

$

3,043

Selling, general and administrative

1,851

1,881

5,785

6,096

$

2,469

$

2,816

$

8,308

$

9,139

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections. Forward-looking statements are based on our managements beliefs and assumptions
and on information currently available to our management. All statements other than statements of historical facts are forward-looking statements for purposes of these provisions, including any projections or earnings. In some cases, you
can identify forward-looking statements by terms such as anticipate, believe, could, estimate, expect, intend, may, plan, potential,
predict, project, should, will, would and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other
factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss
many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading Risk Factors. Given these risks, uncertainties and other factors, you should not place undue reliance on these
forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual
future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We are a biopharmaceutical
company focused on developing and commercializing a portfolio of internally discovered product candidates with an initial focus on neurological disorders. We are currently commercializing
HORIZANT® (gabapentin enacarbil) Extended-Release Tablets in the United States and are developing our novel fumaric acid ester product candidate. We also have two internally discovered product
candidates that may be developed as treatments for neurological disorders in the future to the extent our

resources permit or we enter into collaborations with third parties for such development. HORIZANT and our product candidates are prodrugs that are typically created by modifying the chemical
structure of currently marketed drugs, referred to as parent drugs, and are designed to correct limitations in the oral absorption, distribution and/or metabolism of the parent drug. HORIZANT and each of our product candidates are orally-available,
patented molecules that address potential markets with clear unmet medical needs.

HORIZANT is approved by the U.S. Food and Drug
Administration, or FDA, for the treatment of adults with moderate-to-severe primary restless legs syndrome, or RLS (also known as Willis-Eckbom disease, or WED), and for the management of postherpetic neuralgia, or PHN, in adults. REGNITE® (gabapentin enacarbil) Extended-Release Tablets is licensed to Astellas Pharma Inc. in Japan where it is approved by the Japanese Ministry of Health, Labor and Welfare as a treatment for patients
with RLS.

In addition to HORIZANT, we are actively developing XP23829, a novel fumaric acid ester product candidate that is a prodrug of
monomethyl fumarate, or MMF, which we believe could be a potential treatment for patients with relapsing forms of multiple sclerosis, or MS, psoriasis and/or certain other disorders where the mechanism of action of XP23829 may be relevant. In
September 2013, we announced preliminary results from two Phase 1 clinical trials of XP23829. The first Phase 1 trial was a randomized, double-blind, placebo-controlled, multiple ascending dose study of the pharmacokinetics, safety and tolerability
of two formulations of XP23829 in healthy adult subjects. Five separate cohorts (12 active and three placebo subjects per cohort) were enrolled sequentially and received one of two formulations of XP23829 dosed with or without food. Following
up-titration of up to five days, dosing for each cohort ranged from 400 to 1,000 mg XP23829 per day, administered either once a day, or QD, or twice a day, or BID, with dosing for an additional six days. On the seventh day of target dose
administration, pharmacokinetic, or PK, evaluations were conducted following the morning dose. Similarly, a sixth cohort of healthy subjects received 240 mg BID TECFIDERA® (dimethyl fumarate),
which is also a prodrug of MMF. As a consequence of its higher molecular weight, 400 mg of XP23829 is approximately equimolar to 240 mg of dimethyl fumarate, or DMF (i.e., these amounts of each compound can potentially be enzymatically converted to
approximately the same amount of MMF).

The preliminary results of this trial showed that both formulations of XP23829 produced MMF in the
plasma, but with different PK profiles. The 400 mg BID XP23829 Formulation 1 dosed without food provided an MMF PK profile that was nearly identical to that of 240 mg BID TECFIDERA dosed without food. As expected, XP23829 Formulation 2, administered
as 800 mg QD and 500 mg BID dosed with food, provided more extended exposure to MMF. These cohorts had a lower mean maximal plasma concentration, or Cmax, of MMF, while providing a mean daily area under the concentration versus time curve, or AUC,
of MMF that was approximately 25% less than that seen after dosing 240 mg BID TECFIDERA. In November 2013, we announced additional pharmacodynamic data was assessed in this study. Compared to pre-dosing baseline blood levels, XP23829 dosed once or
twice a day selectively reduced blood lymphocytes and increased blood eosinophils when assessed after 12 days of dosing. Individual subject end-of-treatment lymphocyte and eosinophil counts were within normal limits with few exceptions. There were
no subjects with post-treatment lymphocyte counts below 500 per microliter. Lymphocyte counts returned to baseline levels when assessed eight to ten days after the last dose. These effects were not observed in placebo-dosed subjects, and there was
no effect of XP23829 on other monitored blood cell populations. Other fumaric acid ester compounds, including TECFIDERA and FUMADERM, reduce blood lymphocytes with maximal effect occurring after many months of dosing. Both products are also known to
cause transient minor increases in blood eosinophils. We intend to evaluate further the potential benefits of the rapid onset and reversibility of the XP23829 effect on lymphocytes. Examination of once-a-day dosing as well as lower doses may result
in a better tolerated and effective treatment for patients with relapsing forms of MS and/or psoriasis. XP23829 was generally well tolerated in the study. The most common adverse events were flushing and gastrointestinal-related events, which were
generally mild to moderate in severity.

The second Phase 1 study was an open-label, pharmacokinetic and mass balance study in healthy
male subjects. One group of six subjects received a single dose of XP23829 that incorporated a radiolabel in the fumarate portion of the molecule and a separate group of six subjects received XP23829 with the radiolabel in the promoiety portion of
the molecule. As expected, the metabolism and disposition of radioactivity from the fumarate-labeled version of XP23829 was similar to what has been publicly reported for dosing healthy subjects with DMF labeled in the same position. For the
promoiety-labeled version of XP23829, 98% of the recovered radioactivity was in urine. The major metabolites of the promoiety found in humans were the same as those observed in animal studies.

We have also completed 13-week toxicology studies of XP23829 in
three species. Each study included a dose of DMF chosen to provide a similar MMF exposure to that of the highest dose of XP23829. The adverse effects of XP23829 were similar to those of DMF, except for fewer and less severe adverse effects in the
stomach after dosing XP23829. The target organs for XP23829 were identical to DMF, and there was no increase in severity of any adverse effects for XP23829 compared with DMF. We believe that these preliminary results support a conclusion that all
observed adverse effects of XP23829 were attributable to exposure to MMF, the common active metabolite of DMF and XP23829. Based on the favorable preliminary results from these recent studies, we intend to continue to advance the development of
XP23829. We have engaged outside experts and we are seeking input from the FDAs Neurology Products Division regarding the applicability of a 505(b)(2) pathway, and the preclinical, clinical pharmacology and clinical trial requirements for both
505(b)(2) and 505(b)(1) development programs for treatment of relapsing forms of MS. We are also in the process of preparing an Investigational New Drug, or IND, application for XP23829 as a potential treatment for psoriasis. Provided there are no
objections to our IND application, we plan to conduct a Phase 2 clinical trial in psoriasis to evaluate the efficacy, tolerability and safety of both once-a-day dosing and lower doses of XP23829. We believe that this will be the most effective next
step in the evaluation of XP23829 and could provide important information for future studies in either psoriasis or relapsing forms of MS.

We also have two other product candidates that have completed Phase 2 development that we may
develop further to the extent that our resources permit or we enter into a collaboration with a third party for such development: arbaclofen placarbil, or AP, a potential treatment for spasticity in patients with spinal cord injury; and XP21279, a
potential treatment for patients with advanced idiopathic Parkinsons disease. With respect to AP, we have decided to terminate further investment in AP as a treatment for spasticity in patients with MS; however, given a previous, successful
Phase 2 clinical trial of AP as a potential treatment for spasticity in spinal cord injury patients, as resources permit, we may pursue AP for this indication.

On November 8, 2012, we executed a termination and transition agreement with Glaxo Group Limited, or GSK, that terminated our development
and commercialization agreement with respect to HORIZANT, and also provided for a mutual release of claims and resolved all ongoing litigation between the parties. Pursuant to the termination and transition agreement, during a transition period that
ended on April 30, 2013, GSK continued to exclusively commercialize, promote, manufacture and distribute HORIZANT in the United States. We did not receive any revenue nor incur any losses from GSKs sales of HORIZANT during the transition
period. On May 1, 2013, we assumed all responsibilities for further development, manufacturing and commercialization of HORIZANT in the United States. The results of operations of the acquired HORIZANT business, along with the fair values of
the assets acquired in the transaction, have been included in our financial statements since May 1, 2013.

On September 25,
2013, we entered into a Master Manufacturing and Supply Agreement, or the Supply Agreement, with Patheon Pharmaceuticals Inc. pursuant to which Patheon agreed to supply us with commercial supplies of HORIZANT. Under the Supply Agreement, we will
provide non-binding rolling forecasts to Patheon of our long-term requirements for HORIZANT, and from time-to-time deliver binding firm purchase orders for manufacturing and supply of HORIZANT. We will be responsible for providing Patheon with the
active pharmaceutical ingredient in HORIZANT. Our purchase price for the manufacture and supply of HORIZANT from Patheon is volume-based. We are not subject to any minimum purchase requirements under the Supply Agreement, and may purchase our
requirements of HORIZANT from any other qualified suppliers. Prior to our entry into the Supply Agreement with Patheon, GSK supplied us with HORIZANT. Earlier in 2013, due to manufacturing delays, there was a stockout of HORIZANT, meaning that an
insufficient amount of HORIZANT was in the supply chain to meet the demand of orders by pharmacies and wholesalers. As a result of the stockout, we delayed implementation of our full commercial promotion of HORIZANT by approximately one month. If we
or Patheon experience further manufacturing delays or issues, the demand for, and product sales of, HORIZANT could be reduced and our ability to commercialize HORIZANT and our business could be harmed.

In addition to our ability to obtain adequate supplies of HORIZANT for commercial sale, our future product sales of HORIZANT will be dependent
upon the success of our strategies for commercialization, promotion and distribution, as well as our ability to successfully execute on these activities and to comply with applicable laws, regulations and regulatory requirements. Specifically, we
are focusing our promotional and sales efforts on specialty doctors in certain geographic territories and have deployed a dedicated sales team through a contract sales organization to promote HORIZANT in these territories. We believe these efforts,
if successful, will provide a scalable template for potential future commercial expansion. However, our commercialization strategy for HORIZANT is unproven, and our commercialization efforts may not be successful. In this regard, we rely on third
parties to perform a variety of functions related to the sale and distribution of HORIZANT, key aspects of which are out of our direct control. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet
expected deadlines or otherwise do not carry out their contractual duties to us, or if HORIZANT encounters physical or natural damage at their facilities, our ability to deliver HORIZANT to meet commercial demand would be significantly impaired.

Historically, revenues recognized through May 1, 2013 were primarily comprised of up-front, milestone and contingent event-based
payments from our collaboration agreements. However, as a result of our termination and transition agreement with GSK and the return of the commercialization rights to HORIZANT to us, our revenues for the third quarter ended September 30, 2013
consisted primarily of revenues from HORIZANT product sales. Likewise, we expect the future composition of our revenues to consist primarily of revenues from HORIZANT product sales. Although we have begun to recognize revenue from HORIZANT product
sales in the United States, we are very early in our product launch, and our lack of commercialization experience, as an organization and with respect to HORIZANT product sales, will make future operating results difficult to predict. In this
regard, our product sales revenue may vary significantly from period to period as the launch progresses, and we may be unable to meaningfully increase HORIZANT product sales above the levels recorded by GSK or otherwise successfully commercialize
HORIZANT in a timely manner or at all. We also expect that the expenses of establishing and maintaining sales and marketing capabilities and a distribution and supply chain infrastructure will continue to be substantial, and these costs may exceed
the revenues that we are able to generate from HORIZANT product sales. We recorded $3.7 million in net sales from HORIZANT after the transition period ended on April 30, 2013 through September 30, 2013.

Gabapentin enacarbil is licensed to Astellas in Japan. We are entitled to receive percentage-based high-teen royalties on net sales of REGNITE
in Japan, and the royalties will be recognized when royalty payments are received. In the nine months ended September 30, 2013, the royalty revenue from net sales of REGNITE in Japan was $0.3 million. We expect royalty revenues from our
collaboration with Astellas to fluctuate based on the results of their commercialization, marketing and distribution efforts for

REGNITE in Japan. Additionally, we expect revenues to fluctuate to the extent we enter into new collaborative agreements for our marketed product or any of our product candidates. Prior to May
2013, Astellas also held rights to gabapentin enacarbil in five other Asian countries, including Korea, the Philippines, Indonesia, Thailand and Taiwan. In May 2013, all rights to gabapentin enacarbil in these five countries reverted to us.

We expect our research and development expenses to decrease in the remainder of 2013 primarily due to our decision to terminate further
investment in AP as a potential treatment for spasticity in patients with MS. The timing and amount of research and development expenses incurred will primarily depend upon the extent of current or future clinical trials for XP23829 as well as the
related expenses associated with our development organization, regulatory requirements for our product candidates, product candidate manufacturing costs and our ability to raise additional funds. Our future research and development expenses are
subject to numerous assumptions that may prove to be wrong and also are subject to risks related to the difficulty and uncertainty of clinical success and regulatory approvals of our product candidates.

We believe that our existing capital resources, together with interest thereon and anticipated product revenue, will be sufficient to meet our
projected operating requirements into the third quarter of 2014. However, we have based our estimate of cash sufficiency on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Further,
our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We have no credit facility or committed sources of capital other
than potential contingent event-based and royalty payments that we are eligible to receive under our collaboration agreement with Astellas. We are now responsible for all HORIZANT commercialization and development activities, including all future
post-marketing requirements and commitments. Such costs could be greater than we anticipate and sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional capital. In addition, we do not
believe that revenues generated from HORIZANT and REGNITE sales and other revenues generated from our collaboration with Astellas will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to
experience negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. In any event, we need to raise additional capital in the near term in order to sustain our operations through and beyond the third
quarter of 2014, to maintain a sales infrastructure and marketing and distribution capabilities for HORIZANT, and to continue the development of XP23829. However, additional funds may not be available to us in the near term on terms that are
acceptable to us, or at all. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may be required to, among other things, reduce the amount of resources devoted to medical affairs, advertising, promotion
or sales of HORIZANT, curtail or delay further XP23829 development or conduct additional workforce or other expense reductions, any of which could have a material adverse effect on our business and prospects.

Critical Accounting Policies and Significant Judgments and Estimates

Our managements discussion and analysis of our financial condition and results of operations is based on our financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments
related to revenue recognition, stock-based compensation, fair value measurements and accrued expenses. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical
accounting policies and significant judgments and estimates are detailed in our Annual Report on Form 10-K with the exception of the following revenue recognition policy related to product sales as we acquired the right to the HORIZANT business
effective May 1, 2013.

Revenue Recognition

Product Sales

We
began selling HORIZANT to wholesalers in May 2013 upon the return of its commercial rights from GSK. We recognize revenue from HORIZANT product sales when there is persuasive evidence that an arrangement exists, delivery to the customer has
occurred, the price is fixed or determinable and collectability is reasonably assured. We record estimated reductions to revenues for government rebates such as Medicaid reimbursements, customer incentives such as cash discounts for prompt payment,
distributor fees and expected returns of expired products. These estimates are deducted from gross product sales at the time such revenues are recognized.

Items Deducted from Gross Product Sales

Prompt Pay Discount

We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. Based on GSKs
commercialization experience, we expect our customers to continue to comply with the prompt payment terms to earn the cash discount, as we are selling HORIZANT to the same customers under similar prompt payment terms and conditions. We estimate cash
discounts for prompt payment based on contractual terms, GSKs historical utilization rates and our expectations regarding future utilization rates. We account for cash discounts by reducing accounts receivable by the full amount and
recognizing the discount as a reduction of revenue in the same period the related revenue is recognized.

Under our inventory management agreements with our significant wholesalers, we pay the wholesalers a fee for distribution services as well as
the maintenance of inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales. We accrue the contractual amount and recognize the discount as a reduction of revenue in the same period the related
revenue is recognized.

Product Returns

We do not provide our customers with a general right of product return, but permit returns if the product is damaged or defective when received
by the customer, or if the product has or is nearly expired. HORIZANT tablets currently have a shelf-life of 36 months from date of manufacture. We will accept returns for product that will expire within six months or that have expired up to one
year after their expiration dates. We obtained actual return history by type from GSK since GSKs product launch in 2011, which provides a basis to reasonably estimate our future product returns. The sales returns accrual is estimated
principally based on taking into consideration our specific adjustments to GSKs returns history, the shelf life of product, shipment and prescription trends and estimated distribution channel inventory level. Such estimates require significant
judgment by management.

Government Rebates

We participate in a number of government rebate programs, such as the Medicaid Drug Rebate Program that provides assistance to eligible
low-income patients based on each individual states guidelines regarding eligibility and services; Public Health Services or 340b programs, and the Medicare Part D Coverage Gap Discount Program, which provided rebates on prescriptions that
fall within the donut hole coverage gap; and the Department of Veterans Affairs that offers discounts to authorized users of HORIZANT. HORIZANT is also listed on the Federal Supply Schedule, or FSS, of the General Services
Administration, which provides a discount to the Department of Defense, Department of Veterans Affairs and TriCare. We estimate reductions to our revenues for government rebate programs based on product pricing, current rebates, GSKs
historical and estimated utilization rates, new information regarding changes in these programs regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future rebates for these programs and
estimated levels of inventory in the distribution channel. Such estimates require significant judgment by management.

Patient
Assistance

We offer a co-pay card program to assist commercially insured patients with the cost of their HORIZANT-related
co-payments. Participating retail pharmacies get reimbursed by us for the amount of the co-pay assistance provided to eligible patients. We estimate and accrue the cost of our co-pay program based on historical redemption activity for this program.
We reimburse the participating pharmacies approximately one month after the prescriptions subject to co-pay assistance are filled. These estimates require complex and significant judgment by management and could vary based on program acceptance.

Results of Operations

Three and Nine Months
Ended September 30, 2013 and 2012

Revenues

Our net product sales revenue was from the sales of HORIZANT after the transition period ended on April 30, 2013. Our collaboration
revenue consisted of the recognition of revenues from up-front and milestone payments from our collaboration with Astellas. Our royalty revenue was also from our collaboration with Astellas and was based on net sales of REGNITE in Japan. Our net
revenue from unconsolidated joint operating activities consisted of the recognition of contingent event-based payments and the recognition of our share of operating losses resulting from our prior election to co-promote HORIZANT in the United States
under our prior collaboration with GSK.

The increase in net product sales for the three and nine months ended September 30, 2013 was
due to the acquisition of the HORIZANT business on May 1, 2013 and the first commercial sales by us during the second quarter of 2013.

The decrease in collaboration revenue for the nine months ended September 30, 2013 compared to the same period in 2012 was due to the
recognition of a $10.0 million milestone payment from Astellas in connection with the approval of REGNITE in Japan in the first quarter of 2012.

The decrease in net revenue from unconsolidated joint operating activities for the nine months ended September 30, 2013 compared to the
same period in 2012 was due to the recognition of a $10.0 million contingent payment from GSK in connection with the first commercial sale of HORIZANT by GSK for the management of PHN in adults in 2012. Due to the termination and transition
agreement with GSK, we were not eligible to receive any contingent payments after November 2012.

As a result of our termination and
transition agreement with GSK and the return of the HORIZANT commercialization rights to us, we expect the future composition of our revenues to consist primarily of revenues from HORIZANT product sales. Our future product sales of HORIZANT will be
dependent upon the success of our strategies for commercialization, promotion, manufacturing and distribution, as well as our ability to successfully execute on these activities and to comply with applicable laws, regulations and regulatory
requirements. We expect royalty revenues from our collaboration with Astellas to fluctuate based on the results of their commercialization, marketing and distribution efforts for REGNITE in Japan. Additionally, we expect revenues to fluctuate to the
extent we enter into new collaborative agreements for our marketed product or any of our product candidates.

Cost of Product Sales

Cost of product sales consisted of the direct and indirect costs to manufacture product sold, including tableting, packaging, storage,
shipping and handling costs related to our product sales of HORIZANT. Cost of product sales also included raw materials, specifically gabapentin enacarbil, as acquired from GSK as part of the acquisition of the HORIZANT business and recorded
at fair value. The fair value of the inventory represents a lower cost than if new raw materials were purchased at current third-party costs.

Three MonthsEnded September 30,

Change

Nine MonthsEnded September 30,

Change

2013

2012

$

%

2013

2012

$

%

(In thousands, except percentages)

Cost of product sales

$

305

$



$

305

100

%

$

554

$



$

554

100

%

Cost of product sales increased in the 2013 periods due to HORIZANT product sales that commenced by us in the
second quarter of 2013.

We commenced product sales of HORIZANT in May 2013. We expect cost of product sales for HORIZANT to remain
relatively constant as a percentage of product sales for the remainder of the year.

Research and Development Expenses

Research and development expenses consisted of costs associated with conducting preclinical studies and clinical trials, manufacturing
development efforts for clinical trials and activities related to development-related regulatory filings.

Three MonthsEnded September 30,

Change

Nine MonthsEnded September 30,

Change

2013

2012

$

%

2013

2012

$

%

(In thousands, except percentages)

Research and development

$

6,047

$

9,365

$

(3,318

)

(35

)%

$

29,636

$

32,347

$

(2,711

)

(8

)%

The decrease in research and development expenses in the three months ended September 30, 2013 compared
to the same period in 2012 was principally due to the following:



decreased net costs for AP of $1.8 million primarily due to decreased clinical and manufacturing costs due to the termination of the Phase 3 program for MS patients with spasticity in 2013; and



decreased personnel costs of $1.1 million primarily due to decreased headcount and decreased non-cash stock-based compensation.

The decrease in research and development expenses in the nine months ended September 30,
2013 compared to the same period in 2012 was principally due to the following:



decreased net costs for AP of $1.0 million primarily due to decreased clinical costs due to the termination of the Phase 3 program for MS patients with spasticity in 2013, partially offset by increased manufacturing and
consulting costs; and



decreased personnel costs of $3.7 million primarily due to decreased headcount and decreased non-cash stock-based compensation; partially offset by



increased net costs for XP23829 of $2.5 million primarily due to increased clinical, manufacturing and consulting costs.

We expect our research and development expenses to decrease in the remainder of 2013 due to termination of further investment in AP for the
treatment of spasticity in patients with MS. The timing and amount of research and development expenses incurred will primarily depend upon the extent of current or future clinical trials for XP23829 as well as the related expenses associated with
our development organization, regulatory requirements for our product candidates and product candidate manufacturing costs.

Selling,
General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation for executive,
sales, marketing, finance, legal, compliance and administrative personnel. Other sales, general and administrative expenses include facility costs not otherwise included in research and development expenses, the cost of market research activities,
legal and accounting services, other professional services and consulting fees.

Three MonthsEnded September 30,

Change

Nine MonthsEnded September 30,

Change

2013

2012

$

%

2013

2012

$

%

(In thousands, except percentages)

Selling, general and administrative

$

14,928

$

7,833

$

7,095

91

%

$

41,451

$

22,822

$

18,629

82

%

The increase in selling, general and administrative expenses in the three months ended September 30, 2013
compared to the same period in 2012 was principally due to costs related to the commercialization and promotion of HORIZANT; specifically, increased professional fees of $2.7 million, which included contract sales force costs, marketing costs of
$2.6 million and personnel costs of $1.6 million.

The increase in selling, general and administrative expenses in the nine months ended
September 30, 2013 compared to the same period in 2012 was also principally due to costs related to the commercialization and promotion of HORIZANT; specifically, increased professional fees of $8.5 million, which included contract sales force
costs, marketing costs of $6.2 million and personnel costs of $3.3 million.

Since May 1, 2013, we have been responsible for the
commercialization and promotion of HORIZANT in the United States. Accordingly, we expect substantial increases in 2013 in selling, general and administrative expenses compared to 2012 levels due to the expenses incurred in establishing and
maintaining sales, marketing, distribution and other commercial capabilities largely through third-party service providers.

Interest
Income/Expense

Interest income consisted primarily of interest earned on our cash equivalents and short-term investments, and interest
expense consisted primarily of the accretion of our other noncurrent liability.

Three MonthsEnded September 30,

Change

Nine MonthsEnded September 30,

Change

2013

2012

$

%

2013

2012

$

%

(In thousands, except percentages)

Interest income

$

43

$

66

$

(23

)

(35

)%

$

182

$

176

$

6

3

%

Interest expense

$

106

$



$

106

100

%

$

358

$



$

358

100

%

The increase in interest expense in the three and nine months ended September 30, 2013 related to our
other noncurrent liability.

Due to our significant research and development expenditures, we have generated cumulative operating losses
since we incorporated in 1999. As such, we have funded our research and development operations primarily through sales of our equity securities, non-equity payments from our collaborators and interest earned on investments. At September 30,
2013, we had available cash and cash equivalents and short-term investments of $74.3 million. Our cash and investment balances are held in a variety of interest-bearing instruments, including corporate debt securities, investments backed by
U.S. government-sponsored agencies and money market accounts. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

Net cash used in operating activities was $62.1 million and $23.8 million in the nine months ended September 30, 2013 and 2012,
respectively. The net cash used in operating activities in the nine months ended September 30, 2013 and 2012 primarily reflected our net loss, partially offset by non-cash stock-based compensation.

Net cash provided by (used in) investing activities primarily reflected the timing of purchases of investments and proceeds from maturities of
investments.

We believe that our existing capital resources, together with interest thereon and anticipated product
revenue, will be sufficient to meet our projected operating requirements into the third quarter of 2014. However, we have based our cash sufficiency estimate on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We have no credit
facility or committed sources of capital other than potential contingent event-based and royalty payments that we are eligible to receive under our collaboration agreement with Astellas. We are now responsible for all HORIZANT commercialization and
development activities, including all post-marketing requirements and commitments. Such costs could be greater than we anticipate or sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional
capital. In addition, we do not believe that revenues generated from HORIZANT and REGNITE sales will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to experience negative cash flows for
the foreseeable future as we fund our operating losses and capital expenditures. In any event, we need to raise additional capital in the near term in order to sustain our operations through and beyond the third quarter of 2014, to maintain a sales
infrastructure and marketing and distribution capabilities for HORIZANT, and to continue the development of XP23829. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may be required to, among other
things, reduce the amount of resources devoted to medical affairs, advertising, promotion or sales of HORIZANT, curtail or delay further XP23829 development or conduct additional workforce or other expense reductions, any of which could have a
material adverse effect on our business and prospects.

Our forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in Risk Factors. Because of the
numerous risks and uncertainties associated with the development and commercialization of our marketed product and product candidates, and the extent to which we enter into additional collaborations with third parties to participate in their
development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many
factors, including:



the timing, receipt and amount of sales or royalties from HORIZANT, REGNITE and our other potential products;

the scope, rate of progress, results and cost of our preclinical testing, clinical trials and other research and development activities, including the timing and cost of further development of XP23829;



the cost of manufacturing clinical and commercial supplies of HORIZANT and our product candidates;



the timing and costs of complying with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and any future additional commitments or
requirements imposed on us by the FDA;



the number and characteristics of product candidates that we pursue, including any additional potential indications for HORIZANT or the extent to which we pursue any further development of AP or XP21279;



the cost, timing and outcomes of regulatory approvals, if any;



the terms and timing of any collaborative, licensing and other arrangements that we may establish or modify;



the cost and expenses associated with any potential litigation;



the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and



the extent to which we acquire or invest in businesses, products or technologies that complement our business, although we have no commitments or agreements relating to any of these types of transactions.

Until we can generate a sufficient amount of product revenues, if ever, we expect to finance future cash needs through
public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing our common stock, or securities convertible into or exchangeable or exercisable for common stock, our
stockholders will experience dilution. Any debt financing or additional equity that we raise may contain terms that are not favorable to our stockholders or us. To the extent that we raise additional capital through licensing arrangements or
arrangements with collaborative partners, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our
ability to raise additional funds and the terms upon which we are able to raise such funds may be adversely impacted by the uncertainty regarding our financial condition, the commercial prospects of HORIZANT and REGNITE based on their respective
sales to date and our lack of expertise in commercializing products, and/or current economic conditions, including the effects of disruptions to, and volatility in, the credit and financial markets in the United States, Asia, the European Union and
other regions of the world, including those resulting from or associated with rising government debt levels.

Additional funds may not be
available to us in the near term on terms that are acceptable to us, or at all. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may be required to, among other things, reduce the amount of resources
devoted to medical affairs, advertising, promotion or sales of HORIZANT, curtail or delay further XP23829 development or conduct additional workforce or other expense reductions, any of which could have a material adverse effect on our business and
prospects. In addition, we may also need to raise additional funds to comply with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and our inability to obtain funds
sufficient to comply with these requirements could have material adverse consequences to us, including the loss of marketing approval for HORIZANT.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements as defined in Regulation S-K Item 303(a) (4) (ii).

Contractual Obligations

Our future
contractual obligations at September 30, 2013 were as follows (in thousands):

At September 30, 2013, we had non-cancelable purchase orders and minimum purchase
obligations of approximately $1.7 million under our third party manufacturing agreement related to HORIZANT. On November 8, 2012, we executed a termination and transition agreement with GSK, that terminated our development and commercialization
agreement with respect to HORIZANT. GSK provided us inventory of gabapentin enacarbil in GSKs possession that was not required for use by GSK in the manufacture of HORIZANT. In exchange for such inventory, we will make annual payments to
GSK of $1.0 million for six years beginning in 2016.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material
changes during the nine months ended September 30, 2013 to our market risk exposure disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2012.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Based on their evaluation as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as
amended, as of September 30, 2013, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) were effective.

Changes in Internal Control over Financial Reporting.

There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER
INFORMATION

Item 1.

Legal Proceedings

We are not a party to any material legal proceedings at this time.
From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business.

Item 1A.

Risk Factors.

The following risks and uncertainties may have a material adverse
effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not
presently known to us or that we believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and
investors may lose all or part of their investment.

We have marked with an asterisk (*) those risk factors below that reflect
substantive changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2013. In addition, the risk factors entitled Problems in GSKs manufacturing and
supply chain have resulted in the unavailability, or a stockout, of HORIZANT, which will reduce the sales of HORIZANT and could harm our reputation and business and Although we have reached agreement with the FDA on a
Special Protocol Assessment, or SPA, relating to our pivotal Phase 3 clinical trial of AP for the potential treatment of spasticity in patients with MS, this agreement does not guarantee any particular outcome with respect to regulatory review of
the pivotal trial or with respect to regulatory approval of AP that appeared in the Annual Report on Form 10-K have been removed.

Risks
Related to our Business and Industry

We have incurred cumulative operating losses since inception, we expect to continue to
incur losses for the foreseeable future and we may never obtain profitability.*

We have incurred cumulative losses of $518.3
million since our inception in May 1999, including net losses of $18.8 million and $16.8 million for the three months ended September 30, 2013 and 2012, respectively, and net losses of $66.7 million and $33.9 million for the nine months ended
September 30, 2013 and 2012, respectively. We have made, and expect to continue to make, substantial expenditures in connection with our commercialization of HORIZANT® (gabapentin
enacarbil) Extended-Release Tablets and to further develop and potentially commercialize our product candidates. We anticipate increased costs and expenses associated with maintaining sales, marketing and commercial capabilities as well as those
associated with research, development, clinical trials, manufacturing and potential regulatory approvals and commercialization of our product candidates. In addition, we do not believe that revenues generated from sales of HORIZANT and REGNITE® (gabapentin enacarbil) Extended-Release Tablets will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to experience negative cash
flows for the foreseeable future as we fund our operating losses and capital expenditures. Annual losses have had, and will continue to have, an adverse effect on our stockholders equity.

Because of the numerous risks and uncertainties associated with drug development and
commercialization, we are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or sustain profitability. HORIZANT is approved by the U.S. Food and Drug Administration, or FDA, for the treatment of
moderate-to-severe primary restless legs syndrome, or RLS, in adults and for the management of postherpetic neuralgia, or PHN, in adults. As of May 1, 2013, we are solely responsible for the commercialization and further development of
HORIZANT. During a transition period that ended on April 30, 2013, Glaxo Group Limited, or GSK, was responsible for promoting HORIZANT in the United States pursuant to a November 2012 termination and transition agreement that terminated
the prior collaboration agreement between the parties. REGNITE has been approved by the Japanese Ministry of Health, Labour and Welfare, or MHLW, as a treatment for patients with RLS, and Astellas Pharma Inc. is responsible for promoting REGNITE in
Japan.

To date, we have not generated substantial revenue from sales of HORIZANT or REGNITE. We have financed our operations primarily
through the sale of equity securities, non-equity payments from collaborative partners and interest earned on investments. We have devoted substantially all of our past efforts to research and development, including clinical trials. We have devoted
substantial efforts to the initiation of HORIZANT commercial operations, and we expect substantial increases in selling, general and administrative expenses compared to 2012 levels due to the expenses incurred in establishing and maintaining sales,
marketing and commercial capabilities, largely through third-party service providers. If sales-related revenue from HORIZANT, REGNITE or any other product candidate that receives marketing approval is insufficient, if we are unable to develop and
commercialize our product candidates or if development is delayed, we may never become profitable. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our success depends substantially on the success of HORIZANT. If we are unable to maintain sales, marketing, distribution, supply chain
and other sufficient capabilities to sell HORIZANT, or we are unable to enter into and maintain arrangements with third parties to do so, sales of HORIZANT and our business will be harmed.*

For the three months ended March 31, 2013 and the year ended December 31, 2012, net sales in the United States of HORIZANT as
recorded by GSK were only $1.2 million and $6.5 million, respectively. For the three and nine months ended September 30, 2013, we recorded net sales in the United States of HORIZANT of only $2.0 million and $3.7 million, respectively. To
achieve profitability, we will need to generate substantially more product revenue from HORIZANT, REGNITE or our other product candidates that may receive approval.

GSK commercially launched HORIZANT in the United States in 2011 and remained responsible for the commercialization of HORIZANT through a
transition period that ended on April 30, 2013. In May 2013, we deployed a HORIZANT-dedicated sales team through a contract sales organization to promote HORIZANT. Although we have begun to recognize revenue from HORIZANT product sales in the
United States, we are early in our product launch and our sales and ability to successfully commercialize HORIZANT are unproven. To successfully commercialize HORIZANT, we will need to continue our efforts to build and maintain our commercial
organization and infrastructure. These activities have been, and will continue to be, time-consuming and require a significant expenditure of resources up-front prior to receiving any significant revenue from HORIZANT.

Factors that may inhibit or delay our efforts to commercialize HORIZANT or any other approved product candidates include:



the inability of our contract sales organization to provide a sales force with appropriate technical expertise or our inability to recruit and retain adequate numbers of effective sales and marketing personnel;



the inability of sales personnel to obtain access to adequate numbers of physicians to provide appropriate information on the advantages and risks of prescribing HORIZANT or other products that may result from our
product candidates;



the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage compared to companies with more extensive product lines; and



unforeseen costs and expenses associated with creating or contracting for a sales and marketing organization.

The competition for qualified personnel in the pharmaceutical and biotechnology field is intense, and we may experience difficulties in
recruiting, hiring and retaining qualified individuals. Prior to our commercial launch of HORIZANT, we had no experience commercializing products on our own, and we have only limited management expertise in developing and maintaining a commercial
organization. Due to our limited internal resources and the limited amount of time between the termination of the GSK collaboration agreement and the transfer of responsibility for HORIZANT, we have contracted, and anticipate that we will continue
to contract, with third-party vendors to manage much of our growth and sales infrastructure. We will be at risk to the extent we rely on such third parties without effective oversight. In addition, such third-party contractors may not be the most
efficient allocation of resources if we could implement such infrastructure internally in a more cost-effective manner. If we are not successful in recruiting and retaining qualified sales and marketing personnel or in maintaining a sales and
marketing infrastructure, we will have difficulty commercializing HORIZANT or our product candidates, which would adversely affect our business and financial condition.

If we do not successfully market and sell HORIZANT, or if Astellas does not effectively
market and sell REGNITE in Japan, we may be unable to generate significant product revenue and may be unable to achieve profitability.*

Our ability to generate significant revenue from HORIZANT depends on our ability to achieve market acceptance of, and to otherwise effectively
market, HORIZANT for the treatment of RLS and for the management of PHN. We may not be able to devote sufficient resources to the advertising, promotion and sales efforts for HORIZANT. We also need to continue to expend significant time and
resources to train the contract sales force to be credible, persuasive and compliant in discussing HORIZANT with physicians. We also need to continue to train and monitor the contract sales force to ensure that a consistent and appropriate message
about HORIZANT is being delivered. If we are unable to effectively educate physicians and potential customers about the benefits and risks of HORIZANT, we could face significant pressure from generic competition, negative market perception due to
GSKs prior promotional efforts and a lack of physician awareness, third-party reimbursement and differentiation from currently approved treatments. Due to our limited resources, we have made decisions on how best to allocate our resources to
efficiently promote HORIZANT. We may not be correct on our decisions, which would limit the sales we could achieve from HORIZANT and could lead to our failure to capitalize on its market opportunity. For example, we have decided on where to locate
our contract sales representatives based on certain characteristics of the territories. If other territories where we have chosen not to locate a contract sales representative could have generated greater HORIZANT sales than the territories where we
are promoting HORIZANT, we will be unable to capture the full potential value of HORIZANT. In addition, we could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of HORIZANT or with post-marketing
commitments or requirements mandated by the FDA, which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls and total or
partial suspension of production. In addition, if we are unable to effectively train our contract sales force and equip them with effective materials, including medical and sales literature to help inform and educate potential customers about the
benefits and risks of HORIZANT and its proper administration, our efforts to successfully commercialize HORIZANT could be put in jeopardy, which could have a material adverse effect on our financial condition, stock price and operations.

Astellas initiated sales of REGNITE in Japan in July 2012. We have limited control over the amount and timing of resources that Astellas
dedicates to the marketing of REGNITE, and Astellas could fail to effectively commercialize, market and distribute REGNITE. In May 2013, Astellas informed us that they did not have plans for commercialization of REGNITE in the five other Asian
countries in their territory. As a result, in May 2013, all rights to gabapentin enacarbil in Korea, the Philippines, Indonesia, Thailand and Taiwan reverted to us, and we will not receive any revenues from Astellas for the development and
commercialization of gabapentin enacarbil in these territories.

HORIZANT or REGNITE may not achieve significant sales, even if we or
Astellas devote substantial resources to its commercialization. Even if we achieve significant levels of sales of HORIZANT, the expenses of establishing and maintaining sales and marketing capabilities and a distribution and supply chain
infrastructure will be substantial, and such costs may outweigh any sales of HORIZANT, preventing us from achieving profitability. The success of HORIZANT and REGNITE is dependent on a number of factors, which include competition from alternative
treatments for RLS and, in the case of HORIZANT, for the management of PHN, including generic treatments in the United States, pricing pressures and whether HORIZANT can obtain sufficient third-party coverage or reimbursement, among other factors
that are described below.

Earlier in 2013, due to manufacturing delays, there was a stockout of HORIZANT, meaning that an insufficient
amount of HORIZANT was in the supply chain to meet the demand of orders by pharmacies and wholesalers. As a result, starting in March 2013, certain patients who had been prescribed HORIZANT were not able to have such prescriptions filled. Although
the stockout was resolved in May 2013, the implementation of our full commercial promotion of HORIZANT was delayed for approximately one month. We cannot predict the extent of the impact of the prior GSK stockout on our future sales of HORIZANT
resulting from physicians decisions to not prescribe HORIZANT and/or patients frustration due to the lack of available inventory. If we or Patheon Pharmaceuticals Inc., our contract manufacturer of HORIZANT, experience further delays or
issues, our ability to fully commercialize HORIZANT could be hindered, the future demand for, and product sales of, HORIZANT could be further reduced and our business could be harmed, all of which could accelerate our need for additional capital.

Our success also depends substantially on our product candidates that are still under development. If we are unable to bring any of
these product candidates to market, or experience significant delays in doing so, our ability to generate product revenue and our likelihood of success will be reduced.*

Our ability to generate product revenue in the future will depend heavily on the successful development and commercialization of our product
candidates. Our product candidates are either in Phase 2 or Phase 1 clinical development. Any of our product candidates could be unsuccessful if it:



does not demonstrate acceptable safety and efficacy in preclinical studies or clinical trials or otherwise does not meet applicable regulatory standards for approval;



does not offer therapeutic or other improvements over existing or future drugs used to treat the same conditions;



is not capable of being produced in commercial quantities at acceptable costs;



is not accepted in the medical community; or



is not reimbursed by third-party payers or is reimbursed only at limited levels.

For example, in December 2011, following our preliminary results of a Phase 2 clinical trial of
XP21279 for the potential treatment of patients with Parkinsons disease who were experiencing motor fluctuations, we announced that we were deferring further investment in the program pending the outcome of discussions with regulatory
authorities and availability of resources. Following our End-of-Phase 2 meeting with the FDA in June 2012, we plan to continue development of XP21279 to the extent our resources permit or we enter into a collaboration with a third party, which we
may be unable to do. In addition, in May 2013, following our preliminary results of a Phase 3 clinical trial to evaluate arbaclofen placarbil, or AP, for the potential treatment of spasticity in multiple sclerosis, or MS, patients, we announced that
we were terminating further investment in AP as a treatment for spasticity in patients with MS. If additional resources permit or we enter into a collaboration with a third party, we may pursue development of AP as a potential treatment for
spasticity in patients with spinal cord injury. If our resources prove insufficient for the continuing development of XP21279 or AP or we are unable to establish a collaboration with a third party for the development and commercialization of XP21279
or AP, we may be unable to advance their development. If we are unable to make additional product candidates commercially available, we may not be able to generate substantial product revenues, which would adversely affect our business and financial
condition.

We need to raise additional funding in the near term and may be unable to raise capital when needed, which would force
us to delay, reduce or eliminate our commercialization efforts or our product development programs.*

We need to raise additional
capital in the near term in order to sustain our operations through and beyond the third quarter of 2014, to maintain a sales infrastructure and marketing and distribution capabilities for HORIZANT, and to continue the development of XP23829. Our
future funding requirements will depend on many factors, including:



the timing, receipt and amount of sales or royalties from HORIZANT, REGNITE and our other potential products;

the scope, rate of progress, results and cost of our preclinical testing, clinical trials and other research and development activities, including the timing and cost of further development of XP23829;



the cost of manufacturing clinical and commercial supplies of HORIZANT and our product candidates;



the timing and costs of complying with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and any future additional commitments or
requirements imposed on us by the FDA;



the number and characteristics of product candidates that we pursue, including any additional potential indications for HORIZANT or the extent to which we pursue any further development of AP or XP21279;



the cost, timing and outcomes of regulatory approvals, if any;



the terms and timing of any collaborative, licensing and other arrangements that we may establish or modify;



the cost and expenses associated with any potential litigation;



the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and



the extent to which we acquire or invest in businesses, products or technologies that complement our business, although we have no commitments or agreements relating to any of these types of transactions.

Until we can generate a sufficient amount of product revenues, if ever, we expect to finance future cash needs through
public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing our common stock, or securities convertible into or exchangeable or exercisable for common stock, our
stockholders will experience dilution. Any debt financing or additional equity that we raise may contain terms that are not favorable to our stockholders or us. To the extent that we raise additional capital through licensing arrangements or
arrangements with collaborative partners, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our
ability to raise additional funds and the terms upon which we are able to raise such funds may be adversely impacted by the uncertainty regarding our financial condition, the commercial prospects of HORIZANT and REGNITE based on their respective
sales to date and our lack of experience in commercializing products, and/or current economic conditions, including the effects of disruptions to, and volatility in, the credit and financial markets in the United States, Asia, the European Union and
other regions of the world, including those resulting from or associated with rising government debt levels.

We believe that our existing capital resources, together with interest thereon and anticipated
product revenue, will be sufficient to meet our projected operating requirements into the third quarter of 2014. We have based our cash sufficiency estimate on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We have no credit
facility or committed sources of capital other than potential contingent event-based and royalty payments that we are eligible to receive under our collaboration agreement with Astellas. We are now responsible for all HORIZANT commercialization and
development activities, including all post-marketing requirements and commitments. Such costs could be greater than we anticipate, or sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional
capital.

Additional funds may not be available to us in the near term on terms that are acceptable to us, or at all. If adequate funds
are not, or we anticipate that they may not be, available on a timely basis, we may, among other things:



reduce the amount of resources devoted to medical affairs, advertising, promotion or sales of HORIZANT;



curtail or delay further XP23829 development; or



conduct additional workforce or other expense reductions.

For example, in January 2012, we
suspended clinical development activities for XP21279 to focus our resources on development of our other product candidates. In addition, in May 2013, we terminated further investment in AP as a treatment for spasticity in patients with MS to focus
our resources on the commercialization of HORIZANT and continued development of XP23829. If we are required to reduce the amount of resources devoted to medical affairs, advertising, promotion or sales of HORIZANT, curtail or delay further XP23829
development or conduct additional workforce or other expense reductions, our business and prospects could be materially and adversely affected. In addition, we may also need to raise additional funds to comply with the remaining post-marketing
commitments and post-marketing requirements established in connection with the approval of HORIZANT, and our inability to obtain funds sufficient to comply with these requirements could have material adverse consequences to us, including the loss of
marketing approval for HORIZANT.

We rely on third parties to perform many essential services for HORIZANT, including services
related to warehousing and inventory control, distribution, customer service, government price reporting, recording of sales, accounts receivable management, cash collection and adverse event reporting, and if such third parties fail to provide us
with accurate information, perform as expected or comply with legal and regulatory requirements, our efforts to commercialize HORIZANT may be significantly impacted and/or we may be subject to regulatory sanctions.

We intend to continue to rely on third-party service providers to perform a variety of functions related to the sale and distribution of
HORIZANT, key aspects of which are out of our direct control. The services provided by these third parties include warehousing and inventory control, distribution, customer service, government price reporting, recording of sales, accounts receivable
management and cash collection. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties to us, or if HORIZANT encounters
physical or natural damage at their facilities, our ability to deliver HORIZANT to meet commercial demand would be significantly impaired. If these third parties do not provide us with timely and accurate information, it could impact our ability to
comply with our financial reporting, state and federal healthcare professional aggregate spend reporting, government price reporting and securities laws obligations, which could expose us to the risk of shareholder lawsuits and adversely affect our
business. In addition, we have engaged third parties to perform various other services for us relating to adverse event reporting, safety database management, fulfillment of requests for medical information regarding HORIZANT and related services.
If the quality or accuracy of the data maintained or services performed by these third parties is insufficient, we could be subject to regulatory sanctions.

The commercial success of HORIZANT, REGNITE or any other products that we may develop will depend upon the degree of market acceptance
among physicians, patients, healthcare payers and the medical community.*

HORIZANT, REGNITE or any other products that result from
our product candidates may not gain market acceptance among physicians, patients, healthcare payers and the medical community. If these products do not achieve an adequate level of acceptance, we may not generate material product revenues and we may
not become profitable. The degree of market acceptance of HORIZANT, REGNITE or any products resulting from our product candidates will depend on a number of factors, including:



the ability to offer such products for sale at competitive prices;



sufficient third-party coverage or reimbursement for such products;



the product labeling required by the FDA, the Japanese MHLW or any other regulatory authorities;

perceptions about the relationship or similarity between our product candidates and the parent drug upon which each candidate is based;



the timing of market entry relative to competitive treatments;



relative convenience and ease of administration; and



the strength of marketing and distribution support.

For example, as HORIZANT is a prodrug of
an already approved drug, gabapentin, and is indicated for the treatment of conditions that also have been treated by generic competitors, there could be a perception among physicians that HORIZANT may not offer a significant clinical advantage or
be sufficiently differentiated from current treatments to justify its price, thereby limiting the market acceptance and sales that we may achieve with HORIZANT. In addition, HORIZANTs limited past sales performance under GSK and a HORIZANT
inventory stockout earlier in 2013 may create a negative market perception that is difficult to overcome in our marketing efforts.

Our ability to generate revenue from HORIZANT, REGNITE or any other products that we may develop will depend on the availability of
coverage and adequate reimbursement from third-party payers and drug pricing policies and regulations.

In both U.S. and foreign
markets, our ability to commercialize our products successfully and to attract strategic partners for our products depends in significant part on the availability of financial coverage and adequate reimbursement from third-party payers, including,
in the United States, governmental payers such as the Medicare and Medicaid programs, managed care organizations and private health insurers. Many patients may be unable to pay for HORIZANT, REGNITE or any other products that we may develop. We
cannot be sure that coverage and adequate reimbursement in the United States, Japan, Europe or elsewhere will be available for HORIZANT, REGNITE or any other products that we may develop, and any reimbursement that may become available may be
decreased or eliminated in the future. Third-party payers increasingly are challenging prices charged for medical products and services, and many third-party payers may refuse to provide reimbursement for particular drugs when an equivalent generic
drug is available. Although we believe HORIZANT, REGNITE and any other products that may result from our product candidates represent an improvement over the parent drugs upon which they are based and should be considered unique and not subject to
substitution by a generic parent drug, it is possible that a third-party payer may consider HORIZANT, REGNITE or our product candidates and the respective generic parent drug as equivalents and only offer to reimburse patients for the generic drug.
Even if we show improved efficacy or improved convenience of administration with HORIZANT, REGNITE or our product candidates, pricing of the existing parent drug may limit the amount we will be able to charge for HORIZANT, REGNITE or our product
candidates. If reimbursement is not available or is available only at limited levels, we or Astellas may not be able to successfully commercialize HORIZANT, REGNITE or our product candidates, and may not be able to obtain a satisfactory financial
return on such products.

Such reimbursement pricing pressures have increased as a result of the Medicare Prescription Drug Improvement
and Modernization Act of 2003, or the 2003 MMA, due to the enhanced purchasing power of the private sector plans that negotiate on behalf of Medicare beneficiaries. Furthermore, managed care organizations, as well as Medicaid and other government
agencies, continue to seek price discounts. Some states have implemented, and other states are considering, price controls or patient access constraints under the Medicaid program, and some states are considering price-control regimes that would
apply to broader segments of their populations that are not Medicaid-eligible. If legislation were enacted to mandate rebates or provide for direct government negotiation in prescription drug benefits, access and reimbursement for HORIZANT or our
product candidates upon commercialization could be restricted.

The trend toward managed healthcare in the United States and the changes
in health insurance programs, as well as the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, enacted in 2010, may result in lower prices for
pharmaceutical products, including HORIZANT or any other products that may result from our product candidates. In addition, if the 2003 MMA or the PPACA were amended to impose direct governmental price controls and access restrictions, these could
have a significant adverse impact on our business, including on any product sales revenue from HORIZANT. Any future regulatory changes regarding the healthcare industry or third-party coverage and reimbursement may affect demand for HORIZANT or any
other products that we may develop and could harm our sales and profitability.

If our competitors are able to develop and market
products that are more effective, safer or less costly than HORIZANT, REGNITE or any other products that we may develop, our commercial opportunity will be reduced or eliminated.*

We face competition from established pharmaceutical and biotechnology companies, including generic competitors, as well as from academic
institutions, government agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or
are less expensive than HORIZANT, REGNITE or any other products that we may develop. In addition, significant delays in the development of our product candidates could allow our competitors to bring products to market before us and impair our
ability to effectively commercialize our product candidates.

Products that we believe compete with HORIZANT in the United States include the following drugs
approved for the treatment of RLS: MIRAPEX (pramipexole) from Boehringer Ingelheim and generic pramipexole; REQUIP (ropinirole) from GSK and generic ropinirole; and NEUPRO (a rotigotine transdermal system), a dopamine agonist patch from UCB, Inc..
In Japan, we believe that REGNITE competes with pramipexole, and that REGNITE could compete with a rotigotine transdermal system, which was approved in Japan in December 2012. Otsuka has exclusive rights to market the UCB rotigotine transdermal
system in Japan and began its marketing efforts for this product in February 2013. Products that we believe compete with HORIZANT in the United States for the management of PHN include drugs that act on the same target as HORIZANT, such as LYRICA
(pregabalin) and NEURONTIN (gabapentin) from Pfizer Inc., generic gabapentin and GRALISE (once-daily formulation of gabapentin) from Depomed, Inc. HORIZANT could also experience competition from a capsaicin patch (marketed as QUTENZA by Acorda
Therapeutics, Inc.) and transdermal patches containing the anesthetic known as lidocaine, which are sometimes used for the management of PHN.

Products that could compete with XP23829, our product candidate that is a prodrug of monomethyl fumarate, or MMF, include oral and injectable
agents that are approved in the United States for the treatment of relapsing forms of multiple sclerosis. These include oral agents such as AUBAGIO (teriflunomide), marketed by Genzyme Corporation, a Sanofi company, GILENYA (fingolimod), marketed by
Novartis AG, and TECFIDERA (dimethyl fumarate), marketed by Biogen Idec Inc. In addition, several injectable products are approved in the United States and include AVONEX (interferon beta 1a), which is marketed by Biogen Idec, BETASERON (interferon
beta 1b) and EXTAVIA (interferon beta 1b), which are marketed by Bayer AG/Novartis, COPZXONE (glatiramer acetate), which is marketed by Teva Pharmaceutical Industries Ltd., REBIF (interferon beta 1a), which is marketed by Merck Serono S.A. and
TYSABRI (natralizumab), which is marketed by Biogen Idec. There are also a number of possible competitive products that are in late-stage product development in the United States, including BIIB017 (Peginterferon beta1a) from Biogen Idec, DCALIZUMAB
from Abbott/Biogen Idec, LAQUINMOD from Teva and LEMTRADA (alemtuzumab) from Genzyme/Sanofi-Aventis/Bayer HealthCare.

Products that could
compete with XP23829 for the treatment of psoriasis include topical agents, oral systemic therapies and biological therapies. Topical therapies include corticosteroids, anthrolin and synthetic vitamin D and vitamin A. Oral systemic agents include
acitretin, cyclosporine and methotrexate. Biological therapies that are approved to treat psoriasis include ENBREL (etanercept), marketed by Amgen Inc., HUMIRA (adalimumab), marketed by Abbott Laboratories, REMICADE (infliximab), marketed by
Johnson & Johnson and Merck & Co., Inc., and STELARA (ustekinumab), marketed by Johnson & Johnson. There are also a number of possible competitive products that are in late-stage product development in the United States,
including APREMILAST, BRODALUMAB, IXEKIZUMB, SECUKINUMAB and TOFACITINIB that are being developed by Celgene Corporation, Amgen, Eli Lilly and Company, Novartis and Pfizer, respectively.

If resources permit and we choose to develop AP as a potential treatment for spasticity in patients with spinal cord injury, we believe that
AP, our product candidate that is a Transported Prodrug of R-baclofen, could experience competition from several generic drugs approved for the treatment of spasticity, including racemic baclofen, dantrolene sodium and tizanidine. In addition, the
FDA has approved BOTOX (onabotulinumtoxin A) from Allergan Inc. to treat upper limb spasticity in adults. Physicians also prescribe diazepam for the treatment of spasticity. Therapies in development for the treatment of spasticity based on
sustained-release versions of baclofen or R-baclofen include Baclofen GRS from Sun Pharma Advanced Research Company Limited and Arbaclofen Extended-Release Tablets from Osmotica Pharmaceutical Corp.

If resources permit and we choose to develop XP21279 as a potential treatment for idiopathic Parkinsons Disease, products that could
compete with XP21279, our product candidate that is a Transported Prodrug of levodopa, include: generic levodopa/carbidopa drugs and other drugs approved for the treatment of Parkinsons disease, including STALEVO, a combination therapy of
levodopa/carbidopa/entacapone that is marketed in the United States by Novartis; dopamine agonists such as MIRAPEX (pramipexole) as well as REQUIP (ropinirole) and REQUIP XL (ropinirole extended-release tablets), which are marketed by Boehringer
Ingelheim and GSK, respectively; generic dopamine agonists, including pramipexole and ropinirole; and NEUPRO (a rotigotine transdermal system), a dopamine agonist patch from UCB. Impax submitted an NDA for RYTARY (previously known as IPX066), an
extended-release formulation of levodopa/carbidopa, that is currently under FDA review. Other therapies under development in the United States include levodopa/carbidopa formulations such as a levodopa/carbidopa gel delivered by a portable pump
directly into the duodenum being developed by Abbott Laboratories, as well as DM-1992 and OS-320 (extended-release formulations of levodopa/carbidopa being developed by Depomed and Osmotica, respectively).

There may be other compounds of which we are not aware that are at an earlier stage of development and may compete with our products or
product candidates. If any of those compounds are successfully developed and approved, they could compete directly with our products or product candidates.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical
testing, conducting clinical trials, obtaining regulatory approvals and marketing, distributing and selling approved products than we do. Established pharmaceutical companies may invest heavily to quickly discover and develop novel compounds that
could make HORIZANT, REGNITE or our product candidates obsolete. Larger pharmaceutical companies also may have significantly greater sales forces, distribution capabilities and marketing expertise, which may result in more effective communication
and awareness of their products. Smaller or early-stage companies may also prove to be significant competitors,

particularly through collaborative arrangements with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific and
management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our
competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing medicines before we do. We are also aware of other companies that may currently be engaged in the discovery of medicines
that will compete with HORIZANT, REGNITE or the product candidates that we are developing. In addition, in the markets that we are targeting, we expect to compete against current market-leading medicines. If we are not able to compete effectively
against our current and future competitors, our business will not grow and our financial condition will suffer.

Off-label sale or
use of generic gabapentin products could lead to pricing pressure or decrease sales of HORIZANT.

U.S.
physicians are permitted to prescribe legally available drugs for uses that are not described in the drugs labeling and that differ from those uses tested and approved by the FDA. The occurrence of such off-label uses in the practice of
medicine could significantly reduce our ability to market and sell HORIZANT or any other products that we may develop.

We believe that in
the United States, the composition-of-matter patents relating to gabapentin have expired. Off-label prescriptions written for gabapentin for indications for which we are marketing or may develop HORIZANT could adversely affect our ability to
generate revenue from the sales of HORIZANT. This could result in reduced sales and increased pricing pressure on HORIZANT, which in turn would reduce our ability to generate meaningful revenue and have a negative impact on our results of
operations.

If product liability lawsuits are brought against us, we will incur substantial liabilities and may be required to
limit commercialization of HORIZANT or any other products that we may develop.

We face an inherent risk of product liability
exposure related to the commercial use of HORIZANT and the testing of HORIZANT or our product candidates in human clinical trials. If we cannot successfully defend ourselves against claims that HORIZANT, our product candidates or products that we
successfully develop caused injuries, we will incur substantial liabilities.

Regardless of merit or eventual outcome, liability claims
may result in:

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decreased demand for HORIZANT or any product candidates or products that we may develop;

the inability to commercialize any future products that we may develop.

We have product
liability insurance that covers our commercial use and clinical trials up to a $10.0 million annual aggregate limit. Insurance coverage is increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost and we may
not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.

If third parties do not
manufacture HORIZANT, REGNITE or our product candidates in sufficient quantities or at an acceptable cost, commercialization of HORIZANT and REGNITE and clinical development and commercialization of our product candidates would be harmed or
delayed.*

We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of
HORIZANT, REGNITE or any of our product candidates. We also have limited management expertise in commercial supply operations. For our product candidates, we have relied on, and we expect to continue to rely on, a limited number of
third-party drug substance and drug product manufacturers. We do not have commercial supply agreements with any of these third parties for our product candidates, and our agreements with these parties are generally terminable at will by either party
at any time. For HORIZANT, we currently rely on Patheon as our single source supplier of commercial product pursuant to a commercial supply agreement. Our purchase price for the manufacture and supply of HORIZANT is volume-based. Both parties have
early termination rights with notice of varying lengths for various causes, including for the counterpartys uncured breach. Patheon also has the right to terminate the supply agreement upon 18 months prior notice if we sell, assign or
otherwise transfer rights to HORIZANT to a competitor of Patheon. If, for any reason, Patheon or these thirdparty drug substance and drug product manufacturers are unable or unwilling to perform under our agreements or enter into new
agreements, we may not be able to locate alternative manufacturers or enter into favorable agreements with them. Our inability to acquire sufficient quantities of HORIZANT could result in future stockouts and existing patients not having access to
drug product. Any inability to acquire sufficient quantities of our other product candidates in a timely manner from these third parties could delay clinical trials and prevent us or our partners from developing and commercializing these product
candidates in a cost-effective manner or on a timely basis.

Under the terms of our termination and transition agreement with GSK, GSK continued to supply us
with HORIZANT through October 2013, and GSK will also perform certain validation work with respect to the 300 mg dosage form of HORIZANT and other services for us through December 2013. If we are unable to manufacture or contract to manufacture
sufficient quantities of HORIZANT, the commercialization of HORIZANT could be impaired or interrupted. For example, manufacturing delays resulted in a stockout of HORIZANT earlier in 2013. As a result of the manufacturing delays, our full
commercial promotion of HORIZANT was delayed for approximately one month. If we or Patheon experience other delays or issues, our ability to commercialize HORIZANT could be further impaired. As part of the termination and transition agreement, GSK
has provided its inventory of gabapentin enacarbil drug substance to us. Although the inventory of drug substance has reached the end of its specified shelf life, we believe that such inventory will remain in specification and will be usable, or in
the alternative, we believe the drug substance can be re-crystallized into usable form. GSK relied on a single source supplier of gabapentin enacarbil drug substance, and its agreement with such manufacturer has expired. If we are incorrect about
the usability of the gabapentin enacarbil drug substance, are unable to have it meet specifications upon re-crystallization or are unable to enter into an agreement with the contract manufacturer or qualify an alternative manufacturer, we may be
limited in the amount of HORIZANT we could have manufactured and the commercialization of HORIZANT could be impaired or interrupted. In addition, we have an ongoing obligation to make the 300 mg dosage form of HORIZANT available. If the 300 mg
dosage form is not made available to patients, the FDA could require us to change the label for HORIZANT to no longer reference renally-impaired patients or the 300 mg dosage form. Under the terms of our collaboration agreement with Astellas,
Astellas is solely responsible for the manufacture of REGNITE to support its commercialization in Japan. To our knowledge, Astellas is currently relying on single source suppliers for commercial supplies of REGNITE. As a result, if Astellas fails to
manufacture or contract to manufacture sufficient quantities of REGNITE, commercialization of REGNITE could be impaired in Japan.

We rely
on a single source supplier of MMF, which is used to make XP23829, under purchase orders issued from time to time. We are aware of several alternative suppliers of MMF, and we believe at least one alternative manufacturer could potentially supply
MMF in the event that our supplier determines to not sell MMF to us at a price that is commercially attractive. If we are unable to qualify an alternative supplier of MMF, this could delay the development of, and impair our ability to commercialize,
XP23829.

We rely on a single source supplier of XP23829 drug substance under a manufacturing services and supply agreement. In the event
that such supplier terminates the agreement under specified circumstances, we would not be able to manufacture drug substance until a qualified alternative supplier is identified and qualified, which could also delay the development of, and impair
our ability to commercialize, this product candidate. The drug substance is manufactured by a short synthetic process that uses commercially available starting materials. There are no complicated chemistries or unusual equipment required in the
manufacturing process.

We have purchased XP23829 formulated in different forms from multiple suppliers at specified transfer prices under
quotations agreed upon by the parties as part of master services agreements. In the event that such suppliers terminate our agreements under specified circumstances, we would not be able to manufacture XP23829 until an alternative supplier is
qualified. This could delay the development of, and impair our ability to commercialize, XP23829.

We rely on a single source supplier of
R-baclofen, the active agent used to make AP, under purchase orders issued from time to time. In the event that such supplier determines to not sell R-baclofen to us at a price that is commercially attractive, and if we were unable to qualify an
alternative supplier of R-baclofen, this could further delay the development of, and impair our ability to commercialize, this product candidate.

We rely on a single source supplier of our current worldwide requirements of AP drug substance under a manufacturing services and product
supply agreement. In the event that the parties cannot agree to the terms and conditions for this supplier to provide some or all of our clinical and commercial supply needs of drug substance, we would not be able to manufacture AP drug substance
until an alternative supplier is identified and qualified, which could also delay the further development of, and impair our ability to commercialize, this product candidate. The drug substance is manufactured using a four-step synthetic process
that uses commercially available starting materials for each step. There are no complicated chemistries or unusual equipment required in the manufacturing process.

We rely on a single source supplier of AP formulated in sustained-release tablets at specified transfer prices under quotations agreed upon by
the parties as a part of a master services agreement. In the event that such supplier terminates our agreement under specified circumstances, or we are not able to come to an agreement for the commercial supply of AP on reasonable terms, we would
not be able to manufacture AP sustained-release tablets until an alternative supplier is qualified. This could further delay the development of, and impair our ability to commercialize, AP.

We rely on a single source supplier of levodopa, which is used to make XP21279, under purchase orders issued from time to time. We are aware
of several alternative suppliers of levodopa, and we believe at least one alternative manufacturer could potentially supply levodopa in the event that our supplier determines to not sell levodopa to us at a price that is commercially attractive. If
we are unable to qualify an alternative supplier of levodopa, this could further delay the development of, and impair our ability to commercialize, XP21279.

We rely on a single source supplier of XP21279 drug substance under a manufacturing services and
product supply agreement. In the event that such supplier terminates the agreement under specified circumstances, we would not be able to manufacture drug substance until a qualified alternative supplier is identified and qualified, which could also
further delay the development of, and impair our ability to commercialize, this product candidate. The drug substance is manufactured by a four-step synthetic process that uses commercially available starting materials. There are no complicated
chemistries or unusual equipment required in the manufacturing process.

We have purchased XP21279 formulated in sustained-release tablets
from a single source supplier at specified transfer prices under quotations agreed upon by the parties as part of a master services agreement. We have also qualified another supplier for the manufacture of XP21279 with carbidopa bi-layer tablets to
be supplied under quotations agreed upon by the parties as part of a master services agreement. In the event that either supplier terminates its agreement under specified circumstances for the manufacture of XP21279 sustained-release tablets or
carbidopa bi-layer tablets, we would not be able to manufacture XP21279 until an alternative supplier is qualified. This could further delay the development of, and impair our ability to commercialize, XP21279.

If we are required to obtain alternate third-party manufacturers, it could delay or prevent the clinical development and
commercialization of our product candidates.

We may not be able to maintain or renew our existing, or obtain new, third-party
manufacturing arrangements on acceptable terms, if at all. If we are unable to continue relationships with our suppliers for HORIZANT/gabapentin enacarbil, XP23829, AP and XP21279, or to continue relationships at an acceptable cost or if these
suppliers fail to meet our requirements for these product candidates for any reason, we would be required to obtain alternative suppliers. Any inability to obtain qualified alternative suppliers, including an inability to obtain, or delay in
obtaining, approval of an alternative supplier from the FDA, would delay or prevent the clinical development of these product candidates and commercialization of HORIZANT.

Use of third-party manufacturers may increase the risk that we will not have adequate supplies of HORIZANT or our product candidates.*

Our reliance on third-party manufacturers will expose us to risks that could result in disruptions to our supply chain, product
stockouts, patients not having access to their regular treatment, higher costs or lost product revenues, or it could delay or prevent:



the commercialization of our products;



the initiation or completion of clinical trials;



the submission of applications for regulatory approvals; and



the approval of our product candidates by the FDA or foreign regulatory authorities.

In
particular, our or our partners contract manufacturers:



could encounter difficulties in achieving volume production, quality control and quality assurance or suffer shortages of qualified personnel, which could result in their inability to manufacture sufficient quantities
of drugs to meet commercial needs or clinical supplies of HORIZANT, REGNITE or our product candidates;



could terminate or choose not to renew manufacturing agreements, based on their own business priorities, at a time that is costly or inconvenient for us or our partners;



could fail to establish and follow FDA-mandated current good manufacturing practices, or cGMPs, which are required for FDA approval of our product candidates, or fail to document their adherence to cGMPs, either of
which could require costly recalls of products already having received approval, lead to significant delays in the availability of material for clinical study or delay or prevent marketing approval for our product candidates;



could encounter financial difficulties that would interfere with their obligations to supply HORIZANT, REGNITE or our product candidates; and



could breach, or fail to perform as agreed under, manufacturing agreements.

For example,
earlier in 2013, due to manufacturing delays by GSK and Patheon, there was an insufficient amount of HORIZANT in the supply chain to meet the demand of orders of HORIZANT by pharmacies and wholesalers, leading to a one-month delay in our full
commercial promotion of HORIZANT. In addition, we, GSK and Patheon have not made available a 300 mg dosage form of HORIZANT that can be taken by patients with severe renal impairment, and HORIZANT is labeled for such 300 mg dosage form. We have an
ongoing obligation to make this dosage form available. If we, GSK and Patheon are unable to release validation batches and the 300 mg dosage form is not made available to patients, the FDA could require us to change the label for HORIZANT to no
longer reference renally-impaired patients or the 300 mg dosage form.

If we or our partners are not able to obtain adequate supplies of
HORIZANT, REGNITE or our product candidates, it will have a significant impact on the commercialization efforts for HORIZANT or REGNITE, and will make it more difficult to develop our product candidates. HORIZANT, REGNITE, our product candidates and
any products that we may develop may compete with other products and product candidates for access to manufacturing facilities.

In addition, the manufacturing facilities of certain of our suppliers, as well as a storage
facility of drug substance, are located outside of the United States. This may give rise to difficulties in importing our products or product candidates or their components into the United States or other countries as a result of, among other
things, regulatory agency import inspections, incomplete or inaccurate import documentation or defective packaging.

If our
preclinical studies do not produce successful results or our clinical trials do not demonstrate safety and efficacy in humans, we will not be able to commercialize our product candidates.*

To obtain the requisite regulatory approvals to market and sell any of our product candidates, we must demonstrate, through extensive
preclinical studies and clinical trials, that the product candidate is safe and effective in humans. Preclinical and clinical testing is expensive, can take many years and has an uncertain outcome. A failure of one or more of our clinical trials
could occur at any stage of testing. For example, in July 2010, GSK announced top-line results from a 30-week, double-blind, placebo-controlled, Phase 2 clinical trial of HORIZANT as a potential prophylactic treatment for migraine headaches in which
HORIZANT did not demonstrate a statistically significant improvement on the primary endpoint when compared to placebo. In addition, long-term safety concerns may prevent the approval of any of our product candidates by a regulatory authority. For
example, in February 2010, safety concerns related to a preclinical finding of pancreatic acinar cell tumors in rats delayed FDA approval of the HORIZANT NDA at that time. Furthermore, success in preclinical testing and early clinical trials does
not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. In addition, the results of clinical trials by third parties evaluating a prodrug sharing the same parent
drug as our prodrug candidate, including prodrugs of MMF such as Tecfidera, developed by Biogen Idec and approved by the FDA in March 2013, may not be indicative of the results in clinical trials that we may conduct with our prodrug candidate,
including XP23829. Further, unfamiliarity with novel patient-reported outcome tools, trial assessments or endpoints or with certain patient populations, including related subject drop-out rates, could result in additional cost, delay or failure of
our clinical trials. For example, in 2012, as part of the first clinical program we conducted in MS patients with spasticity, based on our discussions with the FDA and in connection with a higher than expected drop-out rate, we modified our
six-month, open-label, safety clinical trial of AP for subjects who complete the 13-week pivotal Phase 3 efficacy trial in an effort to ensure that our development program for AP met the patient exposure requirements previously established with the
FDA. As such, the protocol for the open-label safety trial was modified to allow patients to directly enter the trial without prior participation in the pivotal Phase 3 trial and be dosed for up to nine months. Subsequently, in May 2013, we
announced that the Phase 3 trial was unsuccessful in demonstrating that AP provided statistically significant improvement relative to placebo in the co-primary endpoints of the study (the time-matched change from baseline in Maximum Ashworth score
at the end of the maintenance dose period and a 7-point Patient Global Impression of Change scale at the end of the maintenance period). We have since discontinued any further investment in AP as a treatment for spasticity in patients with MS.

We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process, which could delay
or prevent our ability to commercialize our product candidates, including:



regulators or institutional review boards may not authorize us to commence a clinical trial at a prospective trial site;



our preclinical testing or clinical trials may produce negative or inconclusive results, which may require us to conduct additional preclinical or clinical testing or to abandon projects that we expect to be promising;



we may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks;



risks associated with clinical trial design may result in a failure of the clinical trial to show statistically significant results even if the product candidate is effective;



regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements; and



the effects of our product candidates may not be the desired effects or may include undesirable side effects.

Any failure or delay in commencing or completing clinical trials for our product candidates could severely harm our business.

The commencement and completion of clinical trials for our product candidates may be delayed or terminated as a result of many
factors, including:



delays in patient enrollment, unanticipated high patient drop-out rates and variability in the number and types of patients available for clinical trials, all of which we have experienced in the past;



our inability to manufacture or obtain from third parties materials sufficient for use in preclinical studies and clinical trials;



difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

governmental or regulatory delays and changes in regulatory requirements, policies and guidelines.

For example, based on the results of a planned interim analysis of the clinical data, although no safety concerns were noted, Astellas
terminated its Phase 2 clinical trial of REGNITE as a potential treatment for diabetic peripheral neuropathy, or DPN, due to difficulty in demonstrating a statistically significant advantage of REGNITE over placebo. As a result, Astellas does not
intend to continue the development of REGNITE in Japan as a potential treatment for DPN at this time. Any delay in commencing or completing clinical trials for our product candidates would delay commercialization of our product candidates and
severely harm our business and financial condition. In addition, unforeseen safety issues or side effects could result from our collaborators current or future clinical trials, which could delay or negatively impact commercialization of our
product candidates. It is also possible that none of our product candidates will complete clinical trials in any of the markets in which we or our collaborators intend to sell those product candidates. Accordingly, we or our collaborators would not
receive the regulatory approvals needed to market our product candidates, which would severely harm our business and financial condition.

We rely on third parties to conduct our preclinical and clinical trials. If these third parties do not perform as contractually required
or expected, we may not be able to obtain regulatory approval for, or commercialize, our product candidates.

We do not have the
ability to independently conduct clinical trials, and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators, collaborative partners and contract laboratories, to conduct our clinical
trials. We have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan
and protocol. Moreover, the FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results
are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. For example, we need to prepare, and ensure our
compliance with, various procedures required under good clinical practices, even though third-party contract research organizations have prepared and are complying with their own, comparable procedures. If these third parties do not successfully
carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical
protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates,
or successfully commercialize HORIZANT.

As an illustrative example, in 2011, the FDA announced that certain bioanalytical studies
conducted by a contract research organization may need to be repeated or confirmed by the pharmaceutical company sponsors of the marketing applications that included such studies. The FDAs decision was the result of two inspections and an
internal audit at a facility that identified significant instances of misconduct and violations of federal regulations, including falsification of documents and manipulation of samples. Although we have not contracted with this contract research
organization for any studies or clinical trials, if one of the contract research organizations that conducted trials on our behalf were found to have similar or other violations, the FDA may require such trials to be repeated or it may affect the
approvability of our product candidates and harm our business.

HORIZANT and REGNITE remain, and future products, if any, will
remain, subject to ongoing regulatory review. If we or our collaborative partners fail to comply with continuing regulations, these approvals could be rescinded and the sale of our products could be suspended.*

Any regulatory approval to market a product could be conditioned on conducting additional, costly, post-approval studies or implementing a risk
evaluation and mitigation strategy or could contain strict limits on the indicated uses included in the labeling. For example, the FDA approval of HORIZANT for the treatment of RLS included requirements for GSK to conduct a program of post-marketing
commitments, or PMCs, and post-marketing requirements, or PMRs, in adults, including: a 12-week, double-blind, placebo-controlled efficacy study evaluating 300 mg, 450 mg and 600 mg tablets of HORIZANT dosed once per day; two simulated driving
studies; a drug-drug interaction study with morphine; and a cardiovascular safety, or QTc, study. GSK also agreed to conduct a pediatric program for subjects 13 years and older. The pediatric clinical program, which was not completed by GSK and is
scheduled to commence after requested adult data is obtained and reviewed by the FDA, includes: a pharmacokinetics, or PK, study; a parallel, fixed-dose response efficacy study; a long-term safety study; and a simulated driving study. The specific
protocol submission and trial completion dates for these PMCs/PMRs range from April 2011 through July 2024. Although GSK completed some of these PMCs/PMRs, and has agreed to complete the ongoing low-dose efficacy study, we are responsible for
fulfilling the remaining, and any additional future, post-marketing study requirements, which will be expensive and time-consuming and may divert management time and resources away from our commercialization efforts or the development of our product
candidates. In addition, HORIZANT has certain warnings and precautions in the label, including information that HORIZANT may cause significant driving impairment. A medication guide, which contains information about the labeling intended for the
patient, is also required to be distributed with HORIZANT.

Moreover, a product may later cause adverse effects that limit or prevent its widespread use,
force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries or indications. In addition, the contract manufacturer of a product and its facilities will continue to be subject to FDA
review and periodic inspections to ensure adherence to applicable regulations. In addition, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to HORIZANT, REGNITE and
any future products remain subject to extensive regulatory requirements.

We are also subject to regulation by regional, national, state
and local agencies, including the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those
foreign countries in which we may commercialize our products. The FDCA, the Public Health Service Act and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities
relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion. These statutes
and regulations include anti-kickback statutes and false claims statutes.

The federal Anti-Kickback Statute prohibits, among other
things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under
Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on the one hand and prescribers, purchasers and formulary managers on the other. Although
there are a number of statutory exemptions and regulatory safe harbors protecting identified common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal
false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid.

Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to
customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companys marketing of the product for unapproved, and
thus non-reimbursable, uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare fraud. The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and
federal false claims laws that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include civil monetary penalties,
exclusion of a companys products from reimbursement under government programs, criminal fines and imprisonment. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical
products and prohibit or require reporting of the provision of gifts, meals and entertainment to individual healthcare providers. Other states require the posting of information relating to clinical studies. In addition, California requires
pharmaceutical companies to implement a comprehensive compliance program that includes a limit on expenditures for, or payments to, individual medical or health professionals. We have adopted a comprehensive compliance program that we believe
complies with California law. Several additional states are considering similar proposals. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties. Because of the
breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.

In addition to the federal Anti-Kickback
Statute and federal false claims laws, the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making
false statements relating to healthcare matters. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and its implementing regulations, also imposes certain requirements relating to the
privacy, security and transmission of individually identifiable health information. State and foreign laws governing the privacy and security of health information in certain circumstances differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.

If we or our operations are found to be in violation of any of the laws
described above or any other governmental regulations that apply to us, we may be subject to penalties, including criminal and significant civil penalties, damages, fines, imprisonment, exclusion of products from reimbursement under U.S. federal or
state healthcare programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial
results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend
against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business. Moreover, achieving and sustaining compliance with these laws may prove costly.

We have contracted with a contract sales organization that employs the sales representatives who
promote HORIZANT. However, we expect that government and regulatory agencies will hold us responsible for any actions by such sales representatives or sales organizations. If we or our contract sales organization fails to comply with the regulatory
requirements of the FDA and other applicable U.S. and foreign regulatory authorities or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we and our partners could be subject to administrative
or judicially imposed sanctions, including:

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restrictions on the products, manufacturers or manufacturing processes;

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warning letters;



civil or criminal penalties or fines;



injunctions;



product seizures, detentions or import bans;



voluntary or mandatory product recalls and publicity requirements;



suspension or withdrawal of regulatory approvals;



total or partial suspension of production; and



refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.

If we or Astellas are not able to obtain or maintain required regulatory approvals, we or Astellas will not be able to commercialize
HORIZANT, REGNITE or our product candidates, our ability to generate revenue will be materially impaired and our business will not be successful.*

Our product candidates and the activities associated with their development and commercialization are subject to comprehensive regulation by
the FDA and other agencies in the United States and by comparable authorities in other countries. The inability to obtain or maintain FDA approval or approval from comparable authorities in other countries would prevent us and our actual or
potential collaborative partners from commercializing HORIZANT, REGNITE or our product candidates in the United States or other countries. Although HORIZANT and REGNITE have been approved for commercial sale in the United States and Japan,
respectively, we may never receive regulatory approval for the commercial sale of our product candidates. In addition, even if a product candidate ultimately receives regulatory approval, the regulatory process may include significant delays that
could harm our business. For example, in February 2010, GSK received a Complete Response letter from the FDA in which a preclinical finding of pancreatic acinar cell tumors in rats precluded approval of the HORIZANT NDA for the treatment of RLS at
that time. GSK responded to questions raised by the FDA in the Complete Response letter with an NDA resubmission, which included new data from nonclinical studies of HORIZANT and two epidemiology studies conducted by GSK exploring gabapentin use and
cancer based on the UK General Practice Research Database, as well as a final safety update that provided updated or new safety information on patients in clinical studies who had been treated with HORIZANT. GSK also amended the NDA from a
Section 505(b)(1) to a 505(b)(2) application in order for the FDA to be able to consider published gabapentin nonclinical data in their assessment of HORIZANT. HORIZANT subsequently received approval from the FDA in April 2011. However, our
business was harmed due to the delay in obtaining approval for HORIZANT as a treatment for RLS. Moreover, if the FDA requires that any of our products or product candidates be scheduled by the U.S. Drug Enforcement Agency, or DEA, we or our
collaborative partners will be unable to continue or begin commercial sale of that product until the DEA completes scheduling proceedings. If any of our products or product candidates is classified as a controlled substance by the DEA, we or our
collaborative partners would have to register annually with the DEA and those products or product candidates would be subject to additional regulation.

We have only limited experience in preparing and filing the applications necessary to gain regulatory approvals. The process of applying for
regulatory approval is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the product candidates involved. The application process begins with the submission of an NDA that the FDA initially
reviews and either accepts or rejects for filing. NDA submissions are complex electronic filings, which include vast compilations of data sets, integrated documents and data calculations. The FDA has substantial discretion in the submission process
and may refuse to accept an NDA submission for any reason, including insufficient information or if there are errors or omissions relating to the electronic transmittal process, data entry, data compilation or formatting. For example, in November
2008, GSK withdrew a previously submitted NDA for HORIZANT for the treatment of RLS in connection with the FDAs request that the data from a single study be reformatted.

Changes in the regulatory approval policy during the development period, changes in, or the enactment of, additional regulations or statutes
or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an NDA. If the FDA were to miss a Prescription Drug User Fee Act, or PDUFA, timing goal for one of our product candidates, the
development and commercialization of the product candidate could be delayed or impaired. For example, in November 2009, the FDA notified GSK that it was extending the PDUFA timing goal for HORIZANT for the treatment of RLS to February 2010. In
addition, the Food and Drug Administration Amendments Act of 2007, or FDAAA, mandates FDA advisory committee reviews of all new molecular entities as part of the NDA approval process, although the FDA maintains discretion under FDAAA to approve NDAs
for new molecular entities without advisory committee reviews in certain instances. The FDA may convene an advisory committee at any time during the review process. The advisory committee review process can be a lengthy and uncertain process that
could delay the FDAs NDA approval and delay or impair the development and commercialization of our product candidates.

The FDA has substantial discretion in the approval process and may refuse to approve any
application or decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. Varying interpretations of the data obtained from preclinical and clinical testing or other studies could delay, limit or
prevent regulatory approval of any of our product candidates. As part of their review process, the FDA could require additional studies or trials to satisfy particular safety concerns. For example, although we had discussions with the FDA in June
2012 regarding the studies required by the FDA to support an NDA submission for XP21279 for the potential treatment of advanced idiopathic Parkinsons disease, when or if we decide to pursue these studies and the approval of XP21279, the FDA
could change their guidance or require additional studies, causing delay or the expenditure of additional resources. Even if the FDA or other regulatory agency approves a product candidate, the approval may impose significant restrictions on the
indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product and may impose ongoing commitments or requirements for post-approval studies, including additional research and development and
clinical trials, and we or our collaborative partners may be unable to maintain regulatory approvals for our products. For example, the FDA approval for HORIZANT for the treatment of RLS included requirements for GSK to conduct a number of PMCs and
PMRs. Although GSK has completed and agreed to complete some of the PMCs/PMRs, we are responsible for fulfilling the remaining post-marketing study requirements, or any additional post-marketing requirements that may be imposed on us or HORIZANT,
which will be expensive and time-consuming, and may divert management time and resources away from our commercialization efforts or the development of our product candidates. In addition, the FDA and other agencies also may impose various civil or
criminal sanctions for failure to comply with regulatory requirements, including withdrawal of product approval.

We or our potential
collaborative partners will need to obtain regulatory approval from authorities in foreign countries to market our product candidates in those countries. Approval by one regulatory authority does not ensure approval by regulatory authorities in
other jurisdictions. If we or our potential collaborative partners fail to obtain approvals from foreign jurisdictions, the geographic market for our product candidates would be limited.

An NDA submitted under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act subjects us to the risk that we may be subject
to a patent infringement lawsuit that would delay or prevent the review and approval of our product candidate.*

Certain product
candidates that we develop may be submitted to the FDA for approval under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, as amended, or FDCA, which was enacted as part of the Drug Price Competition and Patent Term Restoration
Act of 1984, also known as the Hatch-Waxman Act. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant and for which the
applicant has not obtained a right of reference. If we develop XP21279 through a positive Phase 3 clinical program, we could potentially submit an NDA seeking its approval for the treatment of advanced idiopathic Parkinsons disease under
Section 505(b)(2) of the FDCA. If we pursue development of AP, we also could potentially submit an NDA seeking its approval for the treatment of spasticity in patients with spinal cord injury under Section 505(b)(2) of the FDCA. The
Section 505(b)(2) application would enable us to reference published literature and/or the FDAs previous finding of safety and effectiveness for baclofen, a drug that has been approved by the FDA for the alleviation of signs and symptoms
of spasticity in patients with MS and may also be of some value in patients with spinal cord injuries and other spinal cord diseases.

For
NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman Act, such NDAs may be required to include certifications, known as Paragraph
IV certifications, that certify that any patents listed in the Patent and Exclusivity Information Addendum of the FDAs publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, with
respect to any product referenced in the Section 505(b)(2) application, are invalid, unenforceable or will not be infringed by the manufacture, use or sale of the product that is the subject of the Section 505(b)(2) application. Under the
Hatch-Waxman Act, the holder of patents that the Section 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the Paragraph IV certification. Filing of a patent infringement lawsuit within 45 days of
the patent owners receipt of notice triggers a one-time, automatic, 30-month stay of the FDAs ability to approve the 505(b)(2) application. Accordingly, we may invest a significant amount of time and expense in the development of one or
more products only to be subject to significant delay and patent litigation before such products may be commercialized, if at all. A Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity
for obtaining approval of a new chemical entity, or NCE, listed in the Orange Book for the referenced product has expired. The FDA may also require us to perform one or more additional clinical studies or measurements to support the change from the
approved product. The FDA may also reject our future Section 505(b)(2) submissions and require us to file such submissions under Section 505(b)(1) of the FDCA, which could cause delay, and be considerably more expensive and time consuming.
These factors, among others, may limit our ability to successfully commercialize our product candidates.

Current healthcare laws
and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to profitably sell any products that we may develop.

The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative and regulatory proposals to change
the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers

and payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality
and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In March 2010, PPACA became law in the United States. PPACA substantially changes the way healthcare is financed by both governmental and
private insurers and significantly affects the pharmaceutical industry. Among the provisions of PPACA of importance to the pharmaceutical industry are the following:

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an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government
healthcare programs;

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an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for branded and generic drugs,
respectively;

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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage
gap period, as a condition for the manufacturers outpatient drugs to be covered under Medicare Part D;

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extension of manufacturers Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain
individuals with income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing manufacturers Medicaid rebate liability;

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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

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new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any transfer of value made or
distributed to teaching hospitals, prescribers and other healthcare providers, and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the
preceding calendar year, with data collection to be required beginning August 1, 2013 and reporting to the Centers for Medicare & Medicaid Services to be required by March 31, 2014 and by the 90th day of each subsequent calendar
year;

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a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;

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expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

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a licensure framework for follow-on biologic products; and

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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

In addition, other legislative changes have been proposed and adopted since PPACA was enacted. In August 2011, the Budget Control Act of 2011,
among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to
reach required goals, thereby triggering the legislations automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January
2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse
effect on our customers and accordingly, our financial operations.

We anticipate that PPACA, as well as other healthcare reform measures
that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for HORIZANT and any approved product, and could seriously harm our business. Any reduction in
reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for
which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payers will reimburse for HORIZANT and any newly-approved drugs, which in turn will put pressure on the pricing of drugs.

We also cannot be certain that HORIZANT or any other products that may result from our product candidates will successfully be placed on
the list of drugs covered by particular health plan formularies, nor can we predict the negotiated price for such products, which will be determined by market factors. Many states have also created preferred drug lists and include drugs on those
lists only when the manufacturers agree to pay a supplemental rebate. If HORIZANT or other products that may result from our product candidates are not included on these preferred drug lists, physicians may not be inclined to prescribe them to their
patients, thereby diminishing the potential market for such products. Astellas will face similar pricing and reimbursement restrictions in Japan for REGNITE, and further efforts to reform the Japanese healthcare system may increase such
restrictions.

If some or all of our patents expire, are invalidated or are unenforceable, or if some or
all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our intellectual property and our business will suffer.*

Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies, HORIZANT,
REGNITE and our product candidates both in the United States and other countries. We have a number of U.S. and foreign patents, patent applications and rights to patents related to our compounds, product candidates, products and technology, but we
cannot guarantee that issued patents will be enforceable or that pending or future patent applications will result in issued patents. Alternatively, a third party may successfully circumvent our patents. Our rights under any issued patents may not
provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.

The
degree of future protection for our proprietary technologies, HORIZANT, REGNITE and our product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our
competitive advantage. For example:

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we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

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we might not have been the first to file patent applications for these inventions;

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others may independently develop similar or alternative technologies or duplicate any of our technologies;

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it is possible that none of our pending patent applications will result in issued patents;

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any patents issued to us or our collaborators may not provide a basis for commercially viable products or may be challenged by third parties; or

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the patents of others may have an adverse effect on our ability to do business.

Even if valid
and enforceable patents cover HORIZANT, REGNITE or our product candidates and technologies, the patents will provide protection only for a limited amount of time.

Our and our collaborators ability to obtain patents is highly uncertain because, to date, some legal principles remain unresolved, there
has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and the specific content of patents and patent applications that are necessary to support and interpret patent claims is
highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing biotechnology patents outside the United States are even more uncertain. Changes in either patent laws or
interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. For example, on September 16, 2011, the Leahy-Smith America Invents Act,
or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent
litigation. The United States Patent Office has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act,
and in particular, the first to file provisions, only became effective in March 2013. Accordingly, it is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.

Even if patents are issued regarding HORIZANT, REGNITE or our product candidates or methods of using them, those patents can
be challenged by our competitors who can argue such patents are invalid and/or unenforceable. For example, in September 2008, a law firm on behalf of an undisclosed client filed an opposition against the patent grant of one of our European patent
applications covering gabapentin enacarbil. The European patent office, at an opposition hearing in April 2010, undertook a full review of the grant of the European patent, and ruled that our European patent covering the composition of matter of
gabapentin enacarbil is valid. While the law firm that filed the opposition initially appealed the ruling on behalf of the undisclosed client, that appeal was withdrawn in November 2010. Patents also may not protect HORIZANT, REGNITE or our product
candidates if competitors devise ways of making them or similar products without legally infringing our patents. The FDCA and FDA regulations and policies provide incentives to manufacturers to challenge patent validity and these same types of
incentives encourage manufacturers to submit NDAs that rely on literature and clinical data not prepared for or by the drug sponsor.

We
may obtain patents for certain product candidates many years before marketing approval is obtained for those products. Because patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial
value of the patent may be limited. However, we may be able to apply for patent term extensions.

As part of the approval process of our product candidates in the United States, the FDA may
determine that the product candidates be granted an exclusivity period during which other manufacturers applications for approval of generic versions of our products will not be granted. Generic manufacturers often wait to challenge the
patents protecting products that have been granted exclusivity until one year prior to the end of the exclusivity period. For example, the FDA granted HORIZANT five years of regulatory exclusivity based on it being a new chemical entity. It is
possible that generic manufacturers are considering attempts to seek FDA approval for a similar or identical drug as HORIZANT through an abbreviated NDA, which is the application form typically used by manufacturers seeking approval of a generic
drug. If our patents are subject to challenges, we may need to spend significant resources to defend such challenges and we may not be able to defend our patents successfully.

We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or
obtainable. However, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors.
Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable. Failure to obtain or maintain trade secret protection could adversely affect our competitive
business position.

Our research and development collaborators may have rights to publish data and other information in which we have
rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated
during the course of their research is subject to certain contractual limitations. In most cases, these individuals or entities are, at the least, precluded from publicly disclosing our confidential information and are only allowed to disclose other
data or information generated during the course of the research after we have been afforded an opportunity to consider whether patent and/or other proprietary protection should be sought. If we do not apply for patent protection prior to such
publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

Third-party claims of intellectual property infringement would require us to spend significant time and money and could prevent us from
developing or commercializing our products.*

Our commercial success depends in part on not infringing the patents and proprietary
rights of other parties and not breaching any licenses that we have entered into with regard to our technologies and products. Because others may have filed, and in the future are likely to file, patent applications covering products or other
technologies of interest to us that are similar or identical to ours, patent applications or issued patents of others may have priority over our patent applications or issued patents. For example, we are aware of a family of third-party patent
applications relating to prodrugs of gabapentin. We believe the applications have been abandoned in the United States, the European Patent Office, Canada, Australia and the United Kingdom. Additionally, with respect to the development of XP23829, we
are aware of third-party patents relating to the use of fumarates in the treatment of MS and psoriasis. With respect to the claims contained in these patent applications and patents, we believe that our activities do not infringe the patents at
issue and/or that the third-party patent or patent applications are invalid. In addition, we believe that in all countries in which we hold or have licensed rights to patents or patent applications related to HORIZANT, REGNITE or gabapentin
enacarbil, the composition-of-matter patents relating to gabapentin have expired. However, it is possible that a judge or jury will disagree with our conclusions regarding non-infringement, invalidity and/or expiration of these patents that may
relate to XP23829 and HORIZANT, and we could incur substantial costs in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits. In addition, there could be other third-party patents or
patent applications covering certain aspects of our planned development or commercialization activities that we are not yet aware of. Any legal action against our collaborators or us claiming damages and seeking to enjoin commercial activities
relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require our collaborators or us to obtain a license to continue to manufacture or market the affected products and processes.
Licenses required under any of these patents may not be available on commercially acceptable terms, if at all. Failure to obtain such licenses could materially and adversely affect our ability to develop, commercialize and sell HORIZANT,
REGNITE or our product candidates. Such legal actions against us could also include the theory of contributory infringement, or claiming that because our prodrugs are broken down in the body into an active, parent drug and other substances, that
we have infringed on patents that cover the use of the active, parent drug. We believe that there may continue to be significant litigation in the biotechnology and pharmaceutical industry regarding patent and other intellectual property rights. If
we become involved in litigation, it could consume a substantial portion of our management and financial resources and we may not prevail in any such litigation.

Furthermore, our commercial success will depend, in part, on our ability to develop additional product candidates in current indications of
interest or opportunities in other indications. Some of these activities may involve the use of genes, gene products, screening technologies and other research tools that are covered by third-party patents. Court decisions have indicated that the
exemption from patent infringement afforded by the Hatch-Waxman Act does not encompass all research and development activities associated with product development. In some instances, we may be required to obtain licenses to such third-party patents
to conduct our development activities, including activities that may have already occurred. It is not known whether any license required under any of these patents would be made available on commercially acceptable terms, if at all. Failure to
obtain such licenses could materially and adversely affect our ability to maintain a pipeline of potential product candidates and to bring new products to market. If we are required to defend against patent suits brought by third parties relating to
third-party patents that may be relevant to our development activities, or if we initiate such suits, we could incur substantial costs in litigation. Moreover, an adverse result from any legal action in which we are involved could subject us to
damages and/or prevent us from conducting some of our development activities.

We may expend our limited resources to market or sell a product or pursue the development
of a particular candidate or indication and fail to capitalize on other products or product candidates or indications that may be more profitable or for which there is a greater likelihood of success.*

Because we have limited financial and managerial resources, we must focus on products and product candidates for the specific indications that
we believe are the most promising. As a result, we may forego or delay pursuit of opportunities with other product candidates or other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us
to fail to capitalize on viable commercial products, including HORIZANT, or profitable market opportunities. In addition, we may spend valuable time and managerial and financial resources on marketing or promoting a product that is not commercially
viable or developing product candidates for specific indications that ultimately do not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product or product candidate,
we may relinquish valuable rights to that product or product candidate through collaboration, licensing or other royalty arrangements in situations where it would have been more advantageous for us to retain sole rights to development and
commercialization.

Safety issues with HORIZANT, REGNITE or our product candidates, or the parent drugs or other components of
HORIZANT, REGNITE or our product candidates, or with approved products of third parties that are similar to HORIZANT, REGNITE or our product candidates, could decrease sales of HORIZANT and REGNITE, or give rise to delays in the regulatory approval
process, restrictions on labeling or product withdrawal.*

Discovery of previously unknown problems, or increased focus on a known
problem, with an approved product may result in restrictions on its permissible uses, including withdrawal of the medicine from the market. The label for HORIZANT currently includes warnings and precautions related to driving impairment,
somnolence/sedation and dizziness, lack of interchangeability with gabapentin, suicidal behavior or ideation, multiorgan hypersensitivity, discontinuation and tumorigenic potential. If we or others later identify undesirable side effects caused by
HORIZANT or any of our other product candidates that receive marketing approval:

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regulatory authorities may require the addition of labeling statements, specific warnings, contraindications or field alerts to physicians and pharmacies;

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regulatory authorities may withdraw their approval of the product and require us to take our approved drug off the market;

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we may be required to change the way the product is administered, conduct additional clinical trials, change the labeling of the product or conduct a Risk Evaluation and Mitigation Strategies, or REMS, program;

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we may have limitations on how we promote our drugs;

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sales of products may decrease significantly;

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we may be subject to litigation or product liability claims; and

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our reputation may suffer.

Any of these events could prevent us from achieving or maintaining
market acceptance of the affected product or could substantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from its sale.

HORIZANT, REGNITE and our product candidates may also be affected by the safety of the parent drugs or drugs related to our products or
product candidates. Although gabapentin, baclofen (which includes the R-isomer of baclofen) and levodopa, the parent drugs of HORIZANT/REGNITE/gabapentin enacarbil, AP and XP21279, respectively, have been used successfully in patients
for many years, newly observed toxicities or worsening of known toxicities, in preclinical studies of, or in patients receiving, gabapentin, baclofen and levodopa, or reconsideration of known toxicities of gabapentin, baclofen or levodopa in the
setting of new indications, could result in increased regulatory scrutiny of HORIZANT/REGNITE/gabapentin enacarbil, AP and XP21279, respectively. For example, the label for baclofen, the R-isomer of which is the parent drug of AP,
includes a warning that hallucinations and seizures have occurred on abrupt withdrawal of baclofen dosing without proper tapering in spasticity patients. Although a product called Fumaderm, which contains fumaric acid ester compounds, including
dimethyl fumarate, or DMF (another prodrug of MMF), has been approved and used in Germany for the treatment of psoriasis, Fumaderm has not been approved in the United States. In addition, in March 2013, the FDA approved Biogen Idecs Tecfidera,
a formulation of DMF, as a treatment for RRMS. Any safety concerns or other problems noted by regulators with respect to DMF, Tecfidera or MMF could increase the risk of regulatory scrutiny of XP23829, possibly delaying or preventing any regulatory
approval of XP23829. For example, it has been reported that some patients taking Fumaderm developed progressive multifocal leukoencephalopathy, or PML, a progressive brain disease. Although Biogen Idec has not reported any events of PML in their
clinical trials of Tecfidera, if a link between PML and Tecfidera, DMF or MMF is established in the future, it could increase regulatory scrutiny of XP23829 or delay or prevent its approval. The FDA has substantial discretion in the NDA approval
process and may refuse to approve any application if the FDA concludes that the risk/benefit analysis of a potential drug treatment for a specific indication does not warrant approval. For example, in February 2010, safety concerns

related to a preclinical finding of pancreatic acinar cell tumors in rats precluded FDA approval of the HORIZANT NDA in RLS in its form at that time. Although there were similar findings of rat
pancreatic acinar cell tumors following treatment with gabapentin, the parent drug of HORIZANT, the FDA has, to date, not prevented the use of gabapentin. In the February 2010 Complete Response letter, the FDA noted that they had concluded that the
seriousness and severity of refractory epilepsy and the benefit to patients provided by gabapentin justified the potential risk at that time. Thus, although the parent drug for, or a drug related to, one of our product candidates may be approved by
the FDA in a particular indication, the FDA may conclude that our product candidates risk/benefit profile does not warrant approval in a different indication, and the FDA may delay or refuse to approve our product candidate. Such conclusion
and refusal would prevent us from developing and commercializing our product candidates and severely harm our business and financial condition. For example, even with the approval of Tecfidera for RRMS, the FDA may not agree that the risk/benefit
profile of XP23829 for the treatment of psoriasis or other potential indications, if established, would warrant approval in such indications. HORIZANT, REGNITE and our product candidates are engineered to be broken down by the bodys natural
metabolic processes and to release the active drug and other substances. While these breakdown products are generally regarded as safe, it is possible that there could be unexpected toxicity associated with these breakdown products that will cause
any or all of HORIZANT/REGNITE/gabapentin enacarbil, XP23829, XP21279 and AP to be poorly tolerated by, or toxic to, humans. Any unexpected toxicity of, or suboptimal tolerance to, our product or product candidates could reduce sales
of HORIZANT and REGNITE, and delay or prevent commercialization of our product candidates.

Additionally, problems with approved products
marketed by third parties that utilize the same therapeutic target or that belong to the same therapeutic class as the parent drug of HORIZANT, REGNITE or our product candidates could adversely affect the commercialization of HORIZANT or REGNITE or
the development of our product candidates. For example, the product withdrawals of Vioxx from Merck & Co., Inc. and Bextra from Pfizer in 2005 due to safety issues have caused other drugs that have the same therapeutic target, such as
Celebrex from Pfizer, to receive additional scrutiny from regulatory authorities. If either gabapentin or pregabalin, drugs from Pfizer that are marketed as Neurontin and Lyrica, respectively, encounters unexpected toxicity problems in humans, the
FDA may restrict the use of HORIZANT since it is believed to share the same therapeutic target as gabapentin and pregabalin. In 2005, the FDA requested that all makers of epilepsy drugs analyze their clinical trial data to determine whether these
drugs increase the risk of suicide in patients. In 2008, the FDA added warnings to 11 antiepileptic drugs, including gabapentin, regarding an increased risk of suicide or suicidal thoughts. In 2009, the FDA approved safety label changes for all
approved antiepileptic drugs, except those indicated only for short-term use, to include a warning about an increased risk of suicidal thoughts or actions. In addition, in 2011, the FDA added warnings to the labels of antiepileptic drugs regarding
an increased risk of drug reaction with Eosinophilia and Systemic Symptoms, or DRESS, also known as multiorgan hypersensitivity, which has been reported in patients taking antiepileptic drugs. HORIZANT, as a compound that is believed to share the
same therapeutic target as antiepileptic drugs such as gabapentin and pregabalin, has similar warnings regarding suicidality and DRESS in its label. Additional scrutiny could be placed on HORIZANT if it is found have an increased risk of suicides or
suicidal behavior. In 2010, the FDA released draft guidance recommending that prospective suicidality assessments be performed in clinical trials of any drug with central nervous system activity. We expect that the FDA will follow this guidance, and
we will be required to perform suicidality assessments in all of our clinical trials, including Phase 1 trials, of any of our product candidates with central nervous system activity. Finally, if the FDA determines that a drug may present a risk of
substance abuse, it can recommend to the DEA that the drug be scheduled under the Controlled Substances Act. While gabapentin is not a scheduled drug at the present time, pregabalin has been scheduled as a controlled substance. Since pregabalin is a
scheduled drug, it is possible that the FDA may require additional testing of HORIZANT in the future, the results of which could lead the FDA to conclude that HORIZANT should be scheduled as well. Scheduled substances are subject to DEA regulations
relating to manufacturing, storage, distribution and physician prescription procedures, and the DEA regulates the amount of a scheduled substance that is available for clinical trials and commercial distribution. Accordingly, any scheduling action
that the FDA or DEA may take with respect to HORIZANT may limit HORIZANTs marketing approval. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for our product candidates would delay
commercialization of our product candidates, and severely harm our business and financial condition.

We may depend on
collaborations to complete the development, regulatory approval and commercialization of some of our product candidates. These collaborations may place the development of our product candidates outside our control, may require us to relinquish
important rights, may otherwise be on terms unfavorable to us and may ultimately not be successful.*

In December 2005, we entered
into a collaboration agreement with Astellas for the development and commercialization of gabapentin enacarbil, also known as REGNITE, in Japan, Korea, the Philippines, Indonesia, Thailand and Taiwan. In February 2007, we entered into an exclusive
collaboration agreement with GSK to develop and commercialize gabapentin enacarbil worldwide, excluding the original Astellas territory. Following a significant dispute in 2012, including the filing of lawsuits in California and Delaware, in
November 2012, we terminated our collaboration agreement with GSK pursuant to a termination and transition agreement, under which the product rights to HORIZANT returned to us in May 2013. We cannot control the amount and timing of resources that
Astellas devotes to the development or commercialization of REGNITE or its marketing and distribution. For example, in May 2013, Astellas informed us that they did not have plans for commercialization of REGNITE in the countries other than Japan in
their territory. As a result, in May 2013, we all rights to gabapentin enacarbil in Korea, the Philippines, Indonesia, Thailand and Taiwan reverted to us. In addition, Astellas may abandon further commercialization of REGNITE in Japan, or terminate
their collaboration agreement with us at any time, which could delay or impair the development and commercialization of REGNITE and harm our business.

In addition to our collaboration with Astellas, we may enter into collaborations with third
parties to further develop and commercialize HORIZANT/gabapentin enacarbil and/or to develop and commercialize some of our product candidates. Our dependence on Astellas for the development and commercialization of REGNITE subjects us to, and
our dependence on future collaborators for development and commercialization of HORIZANT/gabapentin enacarbil or our product candidates will subject us to, a number of risks, including:



we are not able to control the amount and timing of resources that Astellas devotes to the development or commercialization of REGNITE or to its marketing and distribution;



disputes may arise between us and our collaborators, such as the litigation proceedings with GSK in 2012, that result in the delay or termination of the research, development or commercialization of our product
candidates or that result in costly litigation or arbitration that diverts managements attention and resources;



we may not be able to control the amount and timing of resources that our potential future collaborators may devote to the development or commercialization of products and product candidates or to their marketing and
distribution;



collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new
formulation of a product candidate for clinical testing;



if we do not receive timely and accurate information from any collaborator or our third-party vendors regarding sales activities, expenses and resulting operating profits and losses, our estimates at a given point of
time could be incorrect and we could be required to record adjustments in future periods or restate our financial results for prior periods;



collaborators may not be successful in their efforts to obtain regulatory approvals in a timely manner, or at all;



collaborators may receive regulatory sanctions relating to other aspects of their business that could adversely affect the approval or commercialization of our product candidates;



collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary
information or expose us to potential litigation;



business combinations or significant changes in a collaborators business strategy may also adversely affect a collaborators willingness or ability to complete its obligations under any arrangement;



a collaborator could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors;



collaborators may experience financial difficulties; and



the collaboration agreements may be terminated or allowed to expire, which would delay the development or commercialization and may increase the cost of developing or commercializing our product candidates.

For example, in October 2007, we entered into a collaboration agreement with Xanodyne Pharmaceuticals, Inc. for the
development and commercialization of XP21510 in the United States. Effective July 2009, Xanodyne terminated the collaboration agreement. Likewise, our collaboration with GSK was not successful and was terminated following a significant dispute and
litigation related to GSKs performance under the collaboration.

If we do not establish collaborations for our product
candidates, we may have to alter our development and commercialization plans.*

Our strategy includes selectively collaborating
with leading pharmaceutical and biotechnology companies to assist us in furthering development and potential commercialization of some of our product candidates. We intend to do so, especially for indications that involve a large, primary care
market that must be served by large sales and marketing organizations or to develop and commercialize product candidates that fall outside our core focus or our core development capabilities. We face significant competition in seeking appropriate
collaborators, and these collaborations are complex and time consuming to negotiate and document. We may not be able to negotiate additional collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into
any additional collaborations because of the numerous risks and uncertainties associated with establishing additional collaborations. If we are unable to negotiate additional collaborations, we may not be able to maximize the market opportunity of a
product, or we may have to curtail the development of a particular product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization, reduce the scope of our sales or
marketing activities or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to
obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenues. For example, we do not
intend to pursue any further development of AP or XP21279 unless we have sufficient funds to do so or we enter into collaborations with third parties for such development. Accordingly, if we are unable to establish collaborations for these product
candidates, we may determine to abandon these product candidates entirely in which case we would not receive any return on our investments in these product candidates.

As part of a restructuring in 2010, we eliminated our discovery research department, which prevents our ability to discover additional product
candidates at this time. If we are unable to develop suitable product candidates from our internal efforts, we may pursue additional product candidates through in-licensing. Any growth through in-licensing would depend upon the availability of
suitable product candidates at favorable prices and upon advantageous terms and conditions. To obtain additional product candidates, we may also reconstitute our discovery research department, which would require the expenditure of significant
resources and the identification and hiring of a number of highly-skilled employees. Such efforts could divert the time and resources from the later-stage development or commercialization of HORIZANT or our product candidates.

If we are unable to develop or obtain suitable product candidates, we will not be able to increase our revenues in future periods, which could
result in significant harm to our financial position and adversely impact our stock price.

If we fail to attract and keep senior
management and key scientific personnel, we may be unable to successfully develop or commercialize HORIZANT or our product candidates.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and
on our ability to develop and maintain important relationships with leading clinicians. If we are not able to retain our key personnel, we may not be able to successfully develop or commercialize HORIZANT or our product candidates. Competition for
experienced scientists and development staff may limit our ability to hire and retain highly qualified personnel on acceptable terms. In addition, none of our employees have employment commitments for any fixed period of time and could leave our
employment at will. We do not carry key person insurance covering members of senior management or key scientific personnel. If we fail to identify, attract and retain qualified personnel, we may be unable to continue our development and
commercialization activities.

If we use biological and hazardous materials in a manner that causes contamination or injury or
violates laws, we may be liable for damages.

Our development activities involve the use of potentially harmful biological
materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We, the third parties that conduct clinical trials on our behalf and the third parties that manufacture HORIZANT or our product
candidates are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and waste products. The cost of compliance with these laws and regulations could be significant. The failure
to comply with these laws and regulations could result in significant fines and work stoppages and may harm our business.

Our facility is
located in Californias Silicon Valley, in an area with a long history of industrial activity and use of hazardous substances, including chlorinated solvents. Environmental studies conducted prior to our leasing of the site found levels of
metals and volatile organic compounds in the soils and groundwater at our site. While these constituents of concern predated our occupancy, certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and
Liability Act of 1980, impose strict, joint and several liabilities on current operators of real property for the cost of removal or remediation of hazardous substances. These laws often impose liability even if the owner or operator did not know
of, or was not responsible for, the release of such hazardous substances. As a result, while we have not been, we cannot rule out the possibility that we could in the future be held liable for costs to address contamination at the property beneath
our facility, which costs could be material.

Our facility is located near known earthquake fault zones, and the occurrence of an
earthquake, extremist attack or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations.

Our facility is located near known earthquake fault zones and, therefore, is vulnerable to damage from earthquakes. In October 1989, a major
earthquake struck this area and caused significant property damage and a number of fatalities. We are also vulnerable to damage from other types of disasters, including power loss, attacks from extremist organizations, fire, floods and similar
events. If any disaster were to occur, our ability to operate our business could be seriously impaired. We may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do
not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

Our business is increasingly dependent on critical, complex and interdependent information technology systems, including
Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses that may
result in the impairment of production and key business processes.

In addition, our systems are potentially vulnerable to data security breacheswhether by
employees or othersthat may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information
(including sensitive personal information) of our employees, clinical trial patients, customers and others.

Such disruptions and breaches
of security could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Ownership of our
Common Stock

Our stock price is volatile, and purchasers of our common stock could incur substantial losses.*

The market prices for securities of biopharmaceutical companies in general have been highly volatile. The market price of our common stock may
be influenced by many factors, including:



the commercial sales of HORIZANT, REGNITE or any of our other products that may in the future be approved by the FDA or its foreign counterparts;



the costs to maintain adequate sales, marketing and commercial capabilities to commercialize HORIZANT;



adverse results or delays in clinical trials;



the timing of achievement of our clinical, regulatory, partnering and other milestones, such as the commencement of clinical development, the completion of a clinical trial, the filing for regulatory approval or the
establishment of commercial partnerships for one or more of our product candidates;



announcement of FDA approvability, approval or non-approval of our product candidates, and the timing of the FDA review process;



actions taken by regulatory agencies with respect to HORIZANT, REGNITE or our product candidates, our clinical trials or our sales and marketing activities;



actions taken by regulatory agencies with respect to products or drug classes related to HORIZANT, REGNITE or our product candidates;



problems in our manufacturing or supply chain that limit or exhaust the quantity of supplies of HORIZANT that are available to patients;



changes in our collaborators business strategies;



developments in our relationship with Astellas, including potential disputes or the termination or further modification of our agreement with Astellas;

The stock markets in general
and the markets for biotechnology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of
our common stock. In the past, purported class action lawsuits have often been instituted against companies, including our company, whose securities have experienced periods of volatility in market price. Any such litigation brought against us could
result in substantial costs, which would hurt our financial condition and results of operations, divert managements attention and resources and possibly delay our clinical trials or commercialization efforts.

Failure to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of
2002 and the related rules and regulations of the Securities and Exchange Commission, or SEC, require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered
public accounting firm attesting to, and reporting on, the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified,
supplemented or amended from time to time, or if we fail to implement effective internal control over financial reporting around our commercial promotion of HORIZANT, we may not be able to ensure that we can conclude on an ongoing basis that we have
effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot favorably assess, or our independent registered public
accounting firm is unable to provide an unqualified attestation report on, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could
have a material adverse effect on our stock price.

Our operating results will be difficult to predict and will likely fluctuate from quarter to quarter and year to year. Due to our
recent acquisition of the HORIZANT business and lack of our own historical sales data, HORIZANT sales will be difficult to predict from period to period and as a result, you should not rely on HORIZANT sales results in any period as being indicative
of future performance, and sales of HORIZANT may be below the expectation of securities analysts or investors in the future.

The
following factors are likely to result in fluctuations of our operating results from quarter to quarter and year to year:



the level and timing of commercial sales of HORIZANT, REGNITE or any of our other products approved by the FDA or its foreign counterparts;



the costs to maintain adequate sales, marketing and commercial capabilities to commercialize HORIZANT, and the costs associated with fulfilling the remaining, and any additional future, PMCs and PMRs for HORIZANT;

the timing and achievement of our clinical, regulatory, partnering and other milestones, such as the commencement of clinical development, the completion of a clinical trial, the filing for regulatory approval or the
establishment of a commercial partnership for one or more of our product candidates;



announcement of FDA approvability, approval or non-approval of our product candidates and the timing of the FDA review process;



actions taken by regulatory agencies with respect to HORIZANT, REGNITE or our product candidates, our clinical trials or our sales and marketing activities;



actions taken by regulatory agencies with respect to products or drug classes related to HORIZANT, REGNITE or our product candidates;



problems in our manufacturing or supply chain that limit or exhaust the quantity of supplies of HORIZANT that are available to patients;



changes in our collaborators business strategies;



developments in our relationship with Astellas, including potential disputes or the termination or modification of our agreement with Astellas;



actions taken by regulatory agencies with respect to our or our partners compliance with regulatory requirements;

announcements of technological innovations or new products by us or our competitors.

Due to
these fluctuations in our operating results, a period-to-period comparison of our results of operations may not be a good predictor of our future performance. For example, due primarily to the recognition of revenues from up-front, milestone and
contingent event-based payments from our collaboration agreements with Astellas and GSK, we were profitable for the year ended December 31, 2007 and in the three months ended June 30, 2011. However, while recognition of these revenues
resulted in a profitable year or quarter for those periods, we incurred net losses in each full year since 2007. In any particular financial period, the actual or anticipated fluctuations could be below the expectations of securities analysts or
investors and our stock price could decline.

We may become subject to increased stockholder activism efforts that each could cause a
material disruption to our business.*

Certain influential institutional investors and hedge funds have taken steps to involve
themselves in the governance and strategic direction of certain companies due to governance or strategic-related disagreements between such companies and such stockholders. For example, in October 2013, we received a communication from an activist
stockholder urging a change in our capital allocation strategy away from our HORIZANT commercialization efforts and a change in our management. Stockholder activism efforts could result in substantial costs and a diversion of managements
attention and resources, which could harm our business and adversely affect the market price of our common stock.

Because a small
number of existing stockholders own a large percentage of our voting stock, they may be able to exercise significant influence over our affairs, acting in their best interests and not necessarily those of other stockholders.*

As of October 15, 2013, our executive officers, directors and holders of 5% or more of our outstanding common stock, based upon
information known to us and derived from Schedules 13G filed with the SEC, beneficially owned approximately 60% of our common stock. The interests of this group of stockholders may not always coincide with our interests or the interests of other
stockholders. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquiror from attempting to obtain control of us, which in turn could reduce the price
of our common stock.

Our stockholder rights plan and anti-takeover provisions in our charter documents and under Delaware law could
make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws may delay or prevent an acquisition of us, a change in our
management or other changes that stockholders may consider favorable. These provisions include:



a classified board of directors;



a prohibition on actions by our stockholders by written consent;



the ability of our board of directors to issue preferred stock without stockholder approval, which could be used to make it difficult for a third party to acquire us;



notice requirements for nominations for election to the board of directors; and



limitations on the removal of directors.

Moreover, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the
person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

We
have adopted a rights agreement under which certain stockholders have the right to purchase shares of a new series of preferred stock, at an exercise price of $140.00 per one one-hundredth of a share, if a person acquires more than 15% of our common
stock. The rights plan could make it more difficult for a person to acquire a majority of our outstanding voting stock. The rights plan could also reduce the price that investors might be willing to pay for shares of our common stock and result in
the market price being lower than it would be without the rights plan. In addition, the existence of the rights plan itself may deter a potential acquiror from acquiring us. As a result, either by operation of the rights plan or by its potential
deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.

If there
are large sales of our common stock, the market price of our common stock could drop substantially.*

If our existing stockholders
sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly. As of October 15, 2013, we had
47,736,316 outstanding shares of common stock, substantially all of which may be sold in the public market without restriction.

Certificate of Amendment of Amended and Restated Certificate of Incorporation(2)

3.3

Amended and Restated Bylaws(3)

3.4

Certificate of Designation of Series A Junior Participating Preferred Stock(4)

4.1

Specimen Common Stock Certificate(5)

4.2

Form of Right Certificate(6)

4.3

Form of Registered Direct Common Warrant(7)

10.34

Term Sheet for Non-Employee Director Compensation(8)

10.35

Master Manufacturing and Supply Agreement, dated as of September 25, 2013, by and between the Company and Patheon Pharmaceuticals Inc.

31.1

Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)(9)

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document



Confidential treatment has been requested for portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.

(1)

Incorporated herein by reference to the same numbered exhibit of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2005, as filed with the SEC on August 11, 2005.

(2)

Incorporated herein by reference to Exhibit 3.4 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 18, 2012.

(3)

Incorporated herein by reference to Exhibit 3.2 of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2005, as filed with the SEC on August 11, 2005.

(4)

Incorporated herein by reference to Exhibit 3.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 16, 2005.

(5)

Incorporated herein by reference to the same numbered exhibit of our registration statement on Form S-1, as amended (File No. 333-122156), as filed with the SEC on April 13, 2005.

(6)

Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 16, 2005.

(7)

Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 30, 2008.

(8)

Incorporated herein by reference to Exhibit 10.34 of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2013, as filed with the SEC on August 7, 2013.

(9)

This certification accompanies the quarterly report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the
Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Certificate of Amendment of Amended and Restated Certificate of Incorporation(2)

3.3

Amended and Restated Bylaws(3)

3.4

Certificate of Designation of Series A Junior Participating Preferred Stock(4)

4.1

Specimen Common Stock Certificate(5)

4.2

Form of Right Certificate(6)

4.3

Form of Registered Direct Common Warrant(7)

10.34

Term Sheet for Non-Employee Director Compensation(8)

10.35

Master Manufacturing and Supply Agreement, dated as of September 25, 2013, by and between the Company and Patheon Pharmaceuticals Inc.

31.1

Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)(9)

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document



Confidential treatment has been requested for portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.

(1)

Incorporated herein by reference to the same numbered exhibit of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2005, as filed with the SEC on August 11, 2005.

(2)

Incorporated herein by reference to Exhibit 3.4 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 18, 2012.

(3)

Incorporated herein by reference to Exhibit 3.2 of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2005, as filed with the SEC on August 11, 2005.

(4)

Incorporated herein by reference to Exhibit 3.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 16, 2005.

(5)

Incorporated herein by reference to the same numbered exhibit of our registration statement on Form S-1, as amended (File No. 333-122156), as filed with the SEC on April 13, 2005.

(6)

Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 16, 2005.

(7)

Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 30, 2008.

(8)

Incorporated herein by reference to Exhibit 10.34 of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2013, as filed with the SEC on August 7, 2013.

(9)

This certification accompanies the quarterly report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the
Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Newest 8-K & 10-Q Forms

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